Category: Inheritance Tax

A trust is an obligation that binds a trustee, an individual or a company, to deal with assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust is for the benefit of one or more 'beneficiaries'. The act of transferring an asset – such as money, land or buildings – into a trust is often known as ‘making a settlement’ or ‘settling property’. For Inheritance Tax (IHT) purposes, each asset has its own separate identity. 

HMRC’s manuals states the following when describing what is a trust:

The law of trusts is based upon the concept of English law that property rights can be split into:

• the legal ownership, and
• the beneficial interest.

A person who is the absolute owner of property has both the legal and beneficial interest in it. This means that the owner will show up as legal owner, for example, on a land register or on a company register, and will also enjoy any benefit produced by the property.

The absolute owner may split the legal interest from the beneficial enjoyment. This can be done by giving the legal ownership to trustees and the beneficial interest to a named beneficiary (or beneficiaries). Alternatively the owner can keep the legal title and make themselves a trustee.

The rules are complex and there are different types of trusts that need to be considered, such as a joint property or bare trust.

A reduced rate of Inheritance Tax (IHT) of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate is left to charity. The lower rate applies where 10% or more of the ‘net value’ of the estate is left to charity.

The current IHT nil rate band is £325,000 per person, below which no Inheritance Tax is payable. Any unused nil rate band can usually be transferred to a surviving spouse or civil partner.

HMRC also have a calculator tool that will help work out the charity donation required to qualify for the reduced rate and will check whether an existing bequest is sufficient to qualify for the reduced rate. The calculator can be found at www.hmrc.gov.uk/tools/iht-reduced-rate/calculator.htm

In order to use the calculator, you will need to know:

• the value of the assets in the estate;
• how the assets are owned;
• the total value of the assets in each part of the estate (‘component’);
• the value of any debts and liabilities that must be paid out of the estate;
• the amount of any Inheritance Tax relief and exemptions;
• the amount of any charitable donations already made;
• the value of the threshold (‘nil rate band’); and
• the value of gifts the deceased made in the 7 years before death.

A gift smaller than 10% can also be left to charity in your Will. If this is the case, the charitable donation will be taken off the value of your estate before IHT is calculated.

The donation to charity can be a fixed amount, an item or the balance of what’s left after other gifts have been distributed.

It is important to make a Will to ensure that your estate is divided amongst your beneficiaries in accordance with your wishes. If you do not leave a Will the law decides who inherits the estate. This can result in a distribution of assets that would not have been in line with your wishes and can be especially problematic for cohabitees (a couple who live together but are not married and have not entered into a civil partnership).

HMRC’s internal manual lists the following characteristics of a valid Will:

• must be in prescribed form that satisfies all the formalities;
• operates only as declaration of intention and does not prevent a testator or testatrix from disposing during their lifetime of assets which may have been allocated to someone in the will;
• takes effect only on death and until that time the beneficiaries have no interest in the assets;
• may not only deal with dispositions of assets, for example, it may appoint a guardian of minors or give directions on burial or cremation arrangements;
• can be revoked or altered at any time before the testator/testatrix dies; and
• is ambulatory, that is to say it is capable of dealing with property acquired after it was made (provided the property is still owned by the testator at death).

It should be noted that even when a valid Will is in place, arguments between family members, beneficiaries or personal representatives can arise. Any disagreements must be sorted out before the affairs of the person who died can be settled. This can sometimes be so contentious that it has been left to the Courts to decide if a Will made by a deceased person was valid or invalid.

A Will can also be changed after death. This can be done by what is known as a Deed of Variation for up to two years from the date of death and is most often contemplated to reduce Inheritance Tax liability. A Deed of Variation can only be executed with the agreement of all the beneficiaries. It is more complicated if children are involved as they cannot themselves consent to changes.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is in addition to the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

There are a number of reliefs available that can reduce liability to IHT. Of most interest to farmers is the Agricultural Property Relief (APR). Relief is available at a rate of 100% or 50% depending on who farms the land and how long the land has been owned.

The APR can be claimed on assets including farming land or pasture that is used to grow crops or to rear animals intensively, working farmhouses, farm workers’ cottages, barns and stud farms. There is no agricultural relief for farm equipment but the equipment itself may qualify for another relief known as business relief.

The APR is available for working farms in the UK, Channel Islands, the Isle of Man or the European Economic area. It is important to note that the relief is based on the agricultural value if the land. For example, a farmhouse is valued as if it could only be used for agricultural purposes rather than open market value. The valuations of farmhouses in particular is often the subject of debate.

It is important to ensure that any claim for APR is realistic as HMRC’s refusal to accept an APR claim could result in a significant amount of IHT being due together with the possibility of penalties being levied. There can also be issues where the faming business has diversified into non-farming activities such as wind farms, holiday lettings and farm shops.

There are special conditions to prevent exploitation of the relief by a person switching their assets into agricultural property shortly before death or making a transfer. 

There are a number of reliefs available that can reduce liability to Inheritance Tax (IHT).

One of these reliefs is known as IHT Business Relief and is a valuable tax relief for taxpayers with business interests, offering either 50% or 100% relief from IHT on the value of the business assets if certain conditions are met. For example:

• 100% Business Relief can be claimed on a business or interest in a business or on shares held in an unlisted company.
• 50% Business Relief can be claimed on:
  • shares controlling more than 50% of the voting rights in a listed company;
  • land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled; and
  • land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

Relief is only available if the deceased owned the business or asset for at least 2 years before they died. There are a number of restrictions to the relief, for example if the company in question mainly deals with securities, stocks or shares, land or buildings, or in making or holding investments. In some cases, partial Business Relief may be available.

There is a flexible exemption from IHT for taxpayers who make tax exempt gifts and payments that are paid as normal expenditure out of income. With proper planning this can be a useful tool to enable grandparents, for example, to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money after making the gift to maintain their normal standard of living.

HMRC’s internal manual states that "…although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses".

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death. 

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants. 

The transfer does not happen automatically and must be claimed from HMRC when the second spouse or civil partner dies. This is usually done by the executor making a claim to transfer the unused RNRB from the estate of the spouse or civil partner that died first. This transfer can also happen even if the first spouse or civil partner died before the RNRB was introduced on 6 April 2017.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away. 

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.

The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT. A reduced IHT rate of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil-rate band is left to charity.

In order to ascertain whether or not IHT is due, the executor or personal representative of the deceased must value the deceased's estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts. An initial estimate of the value of the estate’s value should be undertaken to help determine if there is IHT to pay. This includes ascertaining the value of any assets owned by the deceased on the day they died, an analysis of any gifts made in the 7 years prior to death and the value of trusts where the deceased had a beneficial interest.

If the estate is likely to owe tax, then accurate valuations will be required. IHT is usually due six months after the end of the month in which the deceased died. In certain cases, it is possible to pay by instalments or to make payments later with the addition of interest.

There are special intestacy rules that govern how assets are divided if you die without making a will. If this happens your assets are passed on to family members in accordance with a set legal formula. This can result in a distribution of assets that would not be in keeping with your final wishes and can be especially problematic for cohabitees (a couple who live together but are not married and have not entered into a civil partnership).

However, if someone dies without a will or any known family their property passes to the Crown as ownerless property. This is known as 'bona vacantia' which literally means vacant goods and by law this property (including money and other personal possessions) passes to the Crown. The bodies that deal with bona vacantia claims vary across the United Kingdom, but they all ultimately represent the Crown.

It is possible to make a claim on the estate but only if you are an 'entitled relative'. The general rules are:

• If there is no will, the person’s spouse or civil partner and then any children have first claim to the estate.
• If there is no spouse or child, anyone descended from a grandparent of the person is entitled to a share in the estate.
• If you are related by marriage, you have no entitlement.

It is also possible for someone who lived together with the deceased (such as a partner) to apply for a grant from the deceased person's estate. The rules are complex and serve as an important reminder to make a will thereby ensuring that your assets are divided amongst family, friends and charities in accordance with your wishes.

We wanted to remind you of the Inheritance Tax (IHT) implications of making cash gifts during the current tax 2022-23 tax year that will end on 5 April 2023.

You can give away up to £3,000 worth of gifts each tax year. This is known as your annual exemption. Any unused part of the annual exemption can be carried forward, but only for one year. So, if you didn’t make any cash gifts in 2021-22, you could gift up to £6,000 this tax year.

There are also generous exemptions for normal gifts made out of your income, but you must be able to maintain your standard of living after making the gift. There are also reliefs available for wedding or civil ceremony gifts. You can gift up to £1,000 per person with higher limits of £2,500 for a grandchild or great-grandchild, £5,000 for a child.

You can also give as many small gifts of up to £250 per person as you want during the tax year but only if you haven’t used another exemption on the same person. There is no IHT to pay on lifetime gifts between you and your spouse or civil partner as long as you both live permanently in the UK.

Other gifts, outside these limits, count towards the value of your estate and should be carefully considered.

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT as a tax-free threshold.

In most cases, an exemption from IHT is available on assets that are passed on death to a surviving spouse or civil partner. Unlike some countries, there is no similar provisions in the UK for exempt transfers between siblings, who have lived together for many years. A new Bill that would amend the existing rules and provide relief for siblings under specific scenarios is currently making its way through the House of Lords.

This Bill, upon receiving Royal Assent, will allow a surviving sibling to benefit from an IHT exemption. The surviving sibling would need to be over the age of 30 and have lived with their sibling for more than 7 years before the date of death. For the purposes of this Bill, siblings are defined as sisters, brothers, half-sisters and half-brothers.

These changes, whilst not having an impact on many people, will offer significant benefits for those that do qualify and could help elderly surviving siblings stay in homes that they have lived in for many years. Until these changes become law, there are certain estate planning actions that should be explored if you are in a similar position. 

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.

The current IHT nil rate band is £325,000 per person, below which no IHT is payable. This is the amount that can be passed on free of IHT as a tax-free threshold. A reduced rate of IHT of 36% (reduced from 40%) applies where 10% or more of a deceased’s net estate after deducting IHT exemptions, reliefs and the nil rate band is left to charity.

In order to ascertain whether or not IHT is due, the executor or personal representative of the deceased must value the deceased's estate. This is done by calculating the total value of the assets and gifts of the deceased and deducting any debts. An initial estimate of the value of the estate’s value should be undertaken to help determine if there is IHT to pay. This includes ascertaining the value of any assets owned by the deceased on the day they died, an analysis of any gifts made in the seven years prior to death and the value of trusts where the deceased had a beneficial interest.

If the estate is likely to owe tax, then full accurate valuations will be required. IHT is usually due six-months after the end of the month in which the deceased died. In certain cases, it is possible to pay by instalments or to make payments later with the addition of interest.

If you inherit property, you are usually not liable to pay tax on the inheritance. This is because any Inheritance Tax (IHT) due should be paid out of the deceased’s estate before any cash or assets are distributed. 

The rate of IHT currently payable is 40% on death and 20% on lifetime gifts. IHT is payable at a reduced rate on some assets if 10% or more of the 'net value' of the estate is left to charities.

If you inherit a property, you are not immediately liable for Stamp Duty, Income Tax or Capital Gains Tax. HMRC would contact you if any IHT was payable.

If you receive an inheritance, you will be liable to Income Tax on any profit earned after the inheritance, for example, Capital Gains Tax (CGT) on the increase in property value after the date of inheritance or tax on rental income. If inheriting a property means you own two properties, you must tell HMRC which property is your main home within two years. There are special rules if the property is held in trust.

It is possible for wealthier taxpayers to make tax exempt gifts and payments that are funded as normal expenditure out of income. This is a very flexible exemption from IHT as there are no specific requirements, for example by making fixed regular gifts to the same person. With proper planning this can be a very useful tool including enabling grandparents to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money for them to maintain their normal standard of living out of their regular income after making the gift.

HMRC’s internal manual states that although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses.

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.