Inheritance Tax Advice

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What is Inheritance Tax?

In the UK, inheritance tax is a tax payable on the estate of an individual who has died.

How much inheritance tax you pay will depend on the value of your estate, which is made up of most things that you own at the date of your death. This includes:

  • Cash, Jewellery & Cars
  • Most stocks and shares
  • Other financial assets
  • Homes & Non-agricultural land
  • Life Insurance policies not written into trust etc.

On top of a charge on the transfer of assets upon death, IHT may also be due on gifts you make within your lifetime that were made in the 7 years (and potentially up to 14 years) prior to your death.

All UK nationals are subject to IHT on their belongings and their assets, wherever they may be in the world.

What is it?
 

How Much Is Inheritance Tax?

There are a number of thresholds which make up your Inheritance Tax Allowance – under these thresholds, no inheritance tax is due on your estate.

  • Nil-Rate Band Allowance
    As of the current (2018/19) tax year, each individual has a nil-rate band allowance of £325,000
  • Main Residence Nil-Rate Band
    In 2018/19 tax year the main residence allowance is set at £125,000 and will gradually rise in future years, reaching £175,000 by 2020/21. It can be used when your main residence is passed to a direct descendant.
  • Transferrable Nil-Rate Band
    You can also transfer any unused nil-rate band and main residence nil-rate band to your spouse, which means the inheritance tax threshold for couples in 2018/19 stands at a potential maximum of £900,000.

Inheritance Tax is charged at 40% on the value of your estate above your total Inheritance Tax Allowance.

How much is it?
 

Who Has To Pay Inheritance Tax?

Inheritance tax is typically paid out of the estate of the deceased.

This must usually happen before a grant of probate can be supplied (the document permitting the management and division of the estate as per the deceased’s wishes). Liquid funds within the estate, such as cash in bank accounts, are typically used to cover the inheritance tax bill.

What if there is not enough cash in the estate to pay the inheritance tax?

Where there are insufficient liquid funds in the estate to pay the bill, which can happen if the bulk of the estate is made up of property or shares, things get a little more complicated.

It usually falls to the person dealing with the estate – known as the executor if the deceased left a will – to cover the inheritance tax bill so probate can be granted and the estate released. The executor can then recoup these funds from the estate when it is later liquified and distributed as per the deceased’s wishes.

Alternatively, if the executor(s) cannot afford to pay the inheritance tax bill, they can take out a loan from a bank against the value of the estate, which banks are fairly well-versed at supplying.

Inheritance tax on gifts

Where an individual makes gifts above the value of their nil-rate band within 7 years of their death, the onus is on the recipient(s) of the gift(s) to pay the inheritance tax bill. This is paid on a sliding scale depending on how long you live after making the gift.

If the gifts you’ve given total less than your nil-rate band, they are re-added to your estate and you must pay inheritance tax on them in the normal way.

Who pays it?
 

When Do You Have to Pay Inheritance Tax?

After someone dies, you must act to work out the estate’s gross value. This is because HMRC will expect the appropriate forms to be filed within 12 months of the death and at least an initial inheritance tax payment (if necessary) to be made within 6 months of the death. If inheritance tax is due, late payments will come with an interest charge.

For property or other assets that take time to sell, you may have the option to pay inheritance tax in yearly instalments. However, there will be interest charged on these instalments.

You will not pay any interest on the first instalment (unless you pay late), but on each later instalment you pay interest on both:

  • The full outstanding tax balance.
  • The instalment itself, from the date it’s due to the date of payment (if it’s paid late).

What assets allow you to pay inheritance tax in instalments?

  • Homes
    You can pay 10% and the interest each year if you decide to keep the house to live in.
  • Shares and securities
    You can pay in instalments if the shares or securities allowed the deceased to control more than 50% of a company.
  • Unlisted shares and securities
    You can pay in instalments for ‘unlisted’ shares or securities (ones not traded on a recognised stock exchange) if they’re worth more than £20,000 or they represent a significant share of the company.
  • Business run for profit
    You can pay in instalments on the net value of a business, but not its assets.

In certain other cases, you may be able to pay inheritance tax in instalments if:

  • At least 20% of the total inheritance tax due is made up of assets qualifying for instalment payments
  • Paying Inheritance Tax in one lump sum will cause financial difficulties.
When is it due?
 

How To Value An Estate For Inheritance Tax?

After an individual dies, it’s important to add up everything they own to check whether the value of their estate exceeds their nil-rate band. If so, inheritance tax is most likely due.

To value an estate:

  • Contact organisations such as banks to find out about the person’s assets
  • Take stock of an individual’s possessions
  • Add in payments triggered on death such as Life Insurance
  • Include all assets in you estimate
  • Consider gifts made before the individual died
  • Work out the individual’s debts such as outstanding mortgages, credit cards, loans etc.

Work out your IHT bill using our inheritance tax calculator below.

How to value your estate
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Making Sense of Inheritance Tax

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Common Inheritance Tax Questions

Inheritance Tax Threshold & Examples

As a single individual, providing the the value of your total estate comes to less than £325,000 in 2018/19, there’s no inheritance tax liability. However, if your estate is worth more than this, IHT is due at 40% on everything above the £325,000 nil-rate band threshold.

The Nil-Rate Band Allowance

The current IHT allowance or ‘nil rate band’ was introduced at the start of the 2009/10 tax year and will remain frozen at £325,000 until the end of 2020/21 tax year.

As of the current (2018/19) tax year, inheritance tax is charged at a rate of 40% on all the assets in an estate that exceed the nil-rate band of £325,000.

Example: Fred and his daughter Frieda…

Fred is single, never married and lives in rented accommodation. He has one daughter, Frieda, and plans to leave everything to her.

When he dies, his estate is worth £500,000. To calculate inheritance tax due on his estate, you take the £500,000 and deduct the £325,000 nil-rate band, leaving £175,000. Inheritance tax will be charged at 40% on this £175,000, leaving Fred’s estate with a £70,000 inheritance tax charge.

Main Residence Nil-Rate Band

From the start of the 2017/18 tax year, Britons will receive an additional inheritance tax threshold that can be used against their main residence when it’s passed to a direct descendant. This main residence nil-rate band (MRNRB) will gradually rise in future years, reaching £175,000 by 2020/21 and increasing by inflation (CPI) thereafter.

Transferrable Nil-Rate Band for Spouses

Transfers of assets between spouses and civil partners are exempt from Inheritance Tax, so you can leave as much as you like to your partner without having to worry about an inheritance tax bill (although an IHT liability will then likely arise on their death).

You can also transfer any unused nil-rate band and main residence nil-rate band to your spouse upon death, which means the inheritance tax threshold for couples in 2018/19 stands at a potential maximum of £900,000.

Partner 1

Partner 2

Nil Rate Band

£325,000

£325,000

Main Residence Allowance

£125,000

£125,000

Total Allowance

£900,000

It’s important to note that it’s a percentage (%) of the remaining allowance that’s passed, not its cash (£) value. If a husband dies and leaves half his nil-rate band to his partner, the partner’s estate will qualify for 50% of the nil-rate band in force at the time of their death – not his.

Example: Tom and Peter

Tom and Peter are civil partners. They have one daughter, Mary. When Tom dies, he leaves £162,500 to Mary, using up half of his £325,000 nil-rate band, and the remainder of his estate to Peter. Peter therefore inherits 50% of his Tom’s nil-rate band, which can be added to his nil-rate band on his death.

Peter dies 10 years later – at this point, let’s say the nil-rate band has increased to £400,000. Peter is therefore able to leave to Mary a total estate of £400,000 (his nil-rate band at date of death) plus 50% of Tom’s used nil-rate band at the date of Peter’s death (£200,000). Mary can therefore inherit a total of £600,000 without any inheritance tax being due.

Inheritance Tax on Property

What is the Main Residence Nil-Rate Band?

Until the start of the 2017/18 tax year, inheritance tax on property was treated just the same as inheritance tax on other assets, such as cash in the bank.

However, from the start of the 2017/18 tax year, the government introduced an extension to the nil-rate band specifically for family homes. The new main residence nil-rate band (MRNRB) applies in cases where the main family home is passed to children (including adopted, foster or step children), grandchildren or into the joint names of the deceased’s child and their spouse.

The MRNRB started at £100,000 and will rise in £25,000 annual increments until the start of the 2020/21 tax year, when it reaches £175,000. Thereafter it will rise in line with inflation (CPI).

Main Residence Nil-Rate Band

Tax Year

Value

2017/18

£100,000

2018/19

£125,000

2019/20

£150,000

2020/21

£175,000

2021/22

Rises in line with inflation

How Does the Inheritance Tax Main Residence Allowance Work?

The allowance can only be applied to one residence (which will need to be nominated in the event that there’s more than one property in the estate) and can’t be used for properties that were never a residence, such as buy-to-lets or commercial properties.

The residence allowance can also be inherited by a spouse or civil partner, even though their partner may have died many years before its introduction in the 2017/18 tax year.

In cases where the first spouse or civil partner dies with an estate worth £2m or less, the remaining spouse will always be entitled to 100% of the standard main residence nil-rate band (MRNRB) for that year.

Inheritance Tax on estates worth over £2 million…

Where the first spouse’s estate is worth more than £2 million, the remaining partner will see any unused main residence allowance they inherit tapered by £1 for every £2 that the deceased’s net estate exceeds £2 million. Where the surviving partner dies and their estate is worth over £2 million, they’ll also be subject to the tapered MRNRB.

Main Residence Nil-Rate Band Example: Jane and Jo

Jane is single and never married. She has one daughter, Jo, to whom she plans to leave everything.

When Jane dies, her estate, including her main residence, is worth £600,000. Inheritance tax charged will be 40% of of £150,000 (£600,000 minus the £325,000 nil-rate band and minus the £125,000 man residence nil-rate band). Jane’s estate must therefore pay an inheritance tax charge of £60,000.

Downsizing and the Main Residence Nil-Rate Band

Anyone who chose to ‘downsize’ or sell their main residence after 8 July 2015, to move into residential care or the home of a relative, will have their main residence allowance protected.

So long as any replacement property or assets that might arise form part of their estate that is passed to their descendants, their full main residence allowance will apply.

Inheritance Tax on Gifts

As well as the abovementioned married couple’s allowance – there’s no inheritance tax liability between husband and wife or civil partners – you can give away a range of gifts in certain circumstances in any given tax year:

  • Annual gift exemption
    You can give away up to a combined total of £3,000 in each tax year (6 April to 5 April) to whomever you chose. You can carry over up to £3,000 in unused IHT allowance from one tax year to the next, but you must use up all of this carried over allowance in that tax year.
  • Small gifts
    Each year you can give as many small gifts up to £250 to as many people as you choose and these are are immediately exempt from inheritance tax, but you can’t use your annual exemption and your small gift exemption on the same person in the same year.
  • Wedding gifts
    You can gift up to £5,000 to your children/stepchildren as a wedding gift. Smaller allowances are available for grandchildren (£2,500) and gifts to friends or other relatives (£1,000).
  • Gifts to charities or political parties
    Certain gifts to political parties as well as those to charities, museums and universities are free from IHT. If you leave more than 10% of your estate to charity, your overall IHT rate is reduced to 36%.
  • Gifts for living costs
    Help a former spouse, elderly dependent or child under 18 in full-time education with their living costs without any IHT liability.
  • Gifts out of excess income
    This covers regular gifts only, such as Christmas and birthday presents, but you must prove that you are able to maintain your current standard of living after making said gifts. The gifts must form a pattern of gift-giving to pass this test.

It’s essential that you can prove gifts you make out of excess income were made:

  • As part of your normal expenditure
  • Out of income (taking one year with another)
  • Leaving behind enough income to maintain your normal standard of living.
 

Taper Relief on Gifts

Any other gifts you make during your lifetime are considered ‘potentially exempt transfers’ or PETs. This means there may be inheritance tax due on these gifts if you die within 7 years (and potentially up to 14 years) of making the gift.

If you’ve given away gifts above the value of your nil-rate band, the onus falls on the recipient(s) of the gift(s) to pay the inheritance tax bill. If your gift-giving is within the nil-rate band, the value of your gift(s) is added back on to your estate and charged for inheritance tax in the normal way.

Inheritance tax on gifts falls the longer between the giving of the gift and the date of the gift-giver’s death – see how this works in the table below.

How Taper Relief on Gifts Works

Years between gift &
death of donor

Rate of inheritance tax applied

< 3 years 40%
3 to 4 years 32%
4 to 5 years 24%
5 to 6 years 16%
6 to 7 years 8%
7 years or more 0%

Using Life Insurance to Pay the Inheritance Tax Bill

Depending on your circumstances, there are two ways you can structure an insurance policy to pay your inheritance tax liability:

  • Whole of Life Insurance is an insurance product that protects you for your whole life and pays out eventually when you die, whenever that may be. This is opposed to the more common term assurance policies, where the term is fixed for a set period and you only receive a payout if you die within that period (say for 25 years after the policy’s live date). This guaranteed payout can then be used to pay an inheritance tax bill at the date of death.
  • Gifts inter vivos insurance is a structured decreasing term insurance policy designed to match the taper relief on gifts to ensure any potential tax liability is covered should the individual pass away within 7 years of making it.

How to avoid Inheritance Tax?

While inheritance tax is due on most assets passing from a deceased individual, or on assets a deceased individual passed within 7 years (and potentially up to 14 years) of their death, there are certain IHT exemptions that you can make use of over and above the gift exemptions mentioned above.

There are a number of specialist asset classes that are exempt from inheritance tax which include but are not limited to:

  • AIM-listed stocks – such shares held directly (ie not in a fund) for a period of two years could potentially escape IHT.
  • Agricultural property – a complex relief based on the agricultural value of a farm that tends to work in tandem with business property relief (BPR).
  • Woodland property – where the wood is managed commercially and qualifies as a business asset.
  • Heritage assets – such as buildings, land or objects of “national scientific, historic or artistic importance”.

For a full breakdown of the different types of investment assets that can be used to avoid potential IHT liabilities, see Investing in IHT-Exempt Assets.

 

What is Business Property Relief?

Business property relief (BPR) may act to reduce the value of a business or its assets for IHT purposes. Note that business relief only applies in situations where the deceased owned the business or asset for at least 2 years prior to their death.

BPR offers business owners 100% IHT relief on:

  • Their business or their interest in a business; or
  • Shares in an unlisted company (or the majority of AIM-listed companies).

Meanwhile, 50% business relief is available on:

  • Share holdings that control more than 50% of the voting rights in a listed company;
  • Land, buildings or machinery owned by the deceased and used by a business in which they were a partner or in which they held a controlling interest;
  • Land, buildings or machinery used in the business and held in a trust that benefits the business.

Certain types of company don’t qualify for business relief. These include:

  • Companies that specialise in making or holding investments or which deal mainly with securities, shares, land or buildings;
  • Companies that are not-for-profit organisations;
  • Companies that are being sold (unless the sale is to a company that will carry on the business and pay the estate mainly in shares from that company);
  • Companies that are being wound up (unless the wind up is intended to allow the business of the company to carry on).

BPR qualifying investments are high risk and can be difficult to sell. The value of the investment and the income from it can fall as well as rise and investors may not get back what they originally invested, even taking into account the tax benefits.

 

Inheritance Tax Calculator

Simply follow these four quick steps to work out your potential inheritance tax liability.
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Your Inheritance Tax Calculation

Your net value of estate:
Inheritance Tax Allowance:
Main Residence Allowance (2017/18 onwards):
The main residence nil-rate band is capped at the lower of the value of your home or the MRNRB threshold in that tax year.
Amount liable to Inheritance Tax:
Inheritance Tax Liability
Neil Adams - Inheritance Tax Expert

These calculators help but sometimes it doesn't beat talking to a human. If you need any support please do not hesitate to pop us a call on 02084327334 .

Neil Adams
Financial Adviser at Drewberry

IMPORTANT NOTES

This calculator is based on our understanding of current tax law, which is subject to change in the future

This IHT calculator doesn't take into account any gifts that you have made in your lifetime which may be subject to inheritance tax

The illustration provided by this inheritance tax calculator shouldn't be construed as legal or tax advice.

Ben Sassoon  Neil Adams  Jonathan Cooper

Need Some Expert Advice?

Inheritance tax is a complicated area, especially when you start to attempt to reduce a potential inheritance tax liability with measures such as trusts and Life Insurance policies.

If you need any help please do not hesitate to pop us a call on 02084327333 or email us at help@drewberry.co.uk. If you are still researching then you can use our inheritance tax calculator or read more of the related guides below.

Tom Conner
by Tom Conner, BSc, MPhil
Director at Drewberry
⏰  10 min read
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