Inheritance Tax

Silver Piggy Bank Secured With Padlock And ChainWhen a person dies, Inheritance Tax has to be paid from their estate, which is all of your possessions. But it only has to be paid if the estate is worth more than the Inheritance Tax Threshold, currently £325,000. It is 40 per cent of the amount over this threshold. But, it is 36 per cent if the estate qualifies for a reduced rate because of a charitable donation, for example, if 10 per cent or more of the estate is left to a charity.

What is Inheritance Tax charged on?

  • The deceased’s estate on their death
  • gifts to individuals made in the seven years immediately preceding a person’s death
  • gifts to close companies and trusts made during the deceased’s lifetime
  • assets in UK-based trusts
  • Gifts given during the giver’s lifetime but from which the giver continues to enjoy a benefit at the time of their death

Who is responsible for paying Inheritance Tax?

  • the deceased’s executor will normally pay the tax from the estate
  • the trustees will normally pay the tax on trust assets (the assets in the trust)
  • if the gift is made within the seven years preceding a person’s death, it will be seen as part of the deceased’s estate and the executor would pay the tax. Only if the executor cannot pay it, then the person who has received or inherited the gift has to pay it.

Inheritance Tax payment deadline

Inheritance Tax should be paid within six months, starting from the end of the month in which the person died. After this period, interest will be charged on the amount outstanding.

What happens when someone living outside the UK dies?

Whether and how much Inheritance Tax has to be paid on a person’s estate if the person was living outside the UK when they died depends on a number of factors.

Where a person was domiciled

A person is usually domiciled in a country if they have their permanent home there and they can normally have only one domicile at a time.

If a person moves abroad from the UK, HM Revenue and Customs (HMRC) will continue to treat them as domiciled in the UK for Inheritance Tax purposes, unless they have either:

  • had their permanent home (been domiciled) outside of the UK for at least three years
  • been resident outside of the UK for at least four of the last 20 Income Tax years

If a person is domiciled in the UK at the time of death, Inheritance Tax would be due on their assets everywhere, including outside the UK. But Inheritance Tax is not payable on ‘excluded assets’, property which is excluded from UK Inheritance Tax. This includes:

  • property outside the UK if the person who is beneficially entitled to the property is non-UK domiciled and not deemed domiciled in the UK
  • property outside the UK which is comprised in a settlement where the settlor was non-UK domiciled and not deemed domiciled in the UK at the time the settlement was created.

If a person is not domiciled in the UK at the time of death, Inheritance Tax would be due only on their assets in the UK.

If the assets were put in trust

Inheritance tax is payable on assets outside the UK that were put in trust while the settlor (the person who set up the trust) was domiciled in the UK.

Are there any exemptions from paying Inheritance Tax?

If the total value of a person’s estate is less than the Inheritance Tax threshold, then there is no need to pay Inheritance Tax. But even if the estate is over the threshold, there are a number of reliefs and exemptions from Inheritance Tax available.

Spouse or civil partner exemption

Gifts made during a person’s lifetime or on death to their spouse or civil partner who has their permanent home in the UK are usually exempt from Inheritance Tax, even if it is over the threshold.

Gifts to charity

Gifts made to charities, political parties, certain bodies of national importance (e.g. the National Trust, Universities) and maintenance funds for historic buildings are exempt from Inheritance Tax. A donation to charity in a person’s will may also reduce the rate at which tax is paid.

Lifetime gifts

The following exemptions are available for gifts made during a person’s lifetime only but not their death:

  • Annual exemption

A person can make gifts of up £3,000 in each tax year and they will be exempt from Inheritance Tax. If a person gives less than £3,000 in any one tax year, the unused amount of the annual exemption can be carried forward to the next tax year only.

  • Small gift exemptions

Gifts of up to £250 can be made to any person each year in addition to the annual exemption.

  • Wedding gifts

Wedding gifts are exempt from Inheritance Tax up to a certain amount depending on who is making the gift. For example, parents can each make gifts up to £5,000, while grandparents can each give up to £2,500. 

Potentially exempt transfers

A potentially exempt transfer is a gift a person makes to someone else who is not their spouse or civil partner. If a person lives for at least seven years after making a potentially exempt transfer, the gift will be exempt from Inheritance Tax. But if a person dies within seven years of making the gift, the potentially exempt transfer becomes chargeable to Inheritance Tax at 40 per cent.

Business, Woodland, Heritage and Agricultural Reliefs

Information on Inheritance Tax relief for any of these types of property can be seen at HM Revenue & Customs website.

Transferring Inheritance Tax thresholds

Married couples and civil partners can transfer gifts during their lifetime to each other without Inheritance Tax having to be paid.

If a person leaves everything they own to their surviving spouse or civil partner, their estate will not have to pay Inheritance Tax. That means that they have not used their own Inheritance Tax threshold, so it can be used to boost the Inheritance Tax threshold of their spouse or civil partner.

How to transfer Inheritance Tax thresholds

The transfer can only be done after the surviving spouse or civil partner dies by their executors. The claim must be made within 24 months (two years) of the surviving spouse or civil partner’s death.

The executors will need to:

  • work out what percentage of the threshold you can transfer
  • gather the supporting documents from the first death including:
    • a copy of the first will if there was one
    • a copy of the grant of probate (or confirmation in Scotland), or death certificate if no  grant was taken out
    • a copy of any deed of variation if one was used to  change the will
  • send the relevant forms and supporting document to HM Revenue and Customs (HMRC).The correct form needed will depend on how much of the threshold is being transferred and the value of the estate when the surviving spouse or civil partner dies.

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