What is Inheritance Tax?

Inheritance Tax is usually paid on an estate when somebody dies. It is also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates do not have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2011-12).

In the Finance Act 2010 it was announced that threshold would be frozen at £325,000 until 2014-2015.

The threshold is extremely important and is known as ‘the Nil Rate Band’.

The Nil Rate Band is the level of assets someone who dies can leave without inheritance tax becoming payable.

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2011-12. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘Nil Rate Band’ to the second spouse or civil partner when they die.

 Example:

Barbara and Barry are married. Barry has not left any gifts during his lifetime and when he dies his entire estate passes to his wife, Barbara. This means that the amount passing to Barbara is exempt from tax because she is his spouse.

Barry therefore leaves a nil rate band of £325,000.

When Barbara dies this means she will have in essence two nil rate bands totaling £650,000.

So, her house worth £200,000, her shares worth £250,000 and her savings of £10,000 can pass direct to her children under her Will without any inheritance tax becoming due.

 There are lots of situations when the bands can be transferred and there are gifts that sometimes need to be reduced. It is often useful to seek advice regarding gifts and if the Nil Rate Band can be used.

 What are the Exemptions and Reliefs?;

 Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:

• Spouse or civil partner exemption. Your estate usually doesn’t owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.
• Charity exemption. Any gifts you make to a ‘qualifying’ charity – during your lifetime or in your will – will be exempt from Inheritance Tax.
• Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
• Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount – you can also use your unused allowance from the previous year but you use the current year’s allowance first.
•  Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
•  Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
•  Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.

 If an estate does not fall into the nil rate band or any of the above exemptions and reliefs then Inheritance Tax may be payable.

Inheritance Tax is calculated at 40% of the deceased’s estate.

Who pays the Inheritance Tax?

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased’s estate.

 The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax – but this is not common.

 It is often the case that if an estate is likely to attract Inheritance Tax then the deceased will have been or should have been advised regarding Inheritance Tax.

 Insurances can be put in place to assist with the payment of Inheritance Tax and this is often useful if someone would not want a family home to be sold in order to repay this amount.

Who pays the Inheritance Tax on certain gifts can also be stipulated in a person’s Will, if that person wishes to be specific about this.

 How to pay Inheritance Tax?

 If it is calculated that IHT is due from an estate then it should be carefully considered as to how a payment will be made and when.

A full account of the deceased’s estate will be required in any event. Firstly, to enable an accurate calculation to be carried out and secondly, to account to show that either IHT is not due or to show that it is due and should be calculated on £x.

 If IHT is payable then the person dealing with the estate needs to apply for an IHT reference number from HMRC. This number should then be quoted on every correspondence and especially on every payment made.

 HMRC will send by post a note of the reference, a payslip and a payment envelope. Taxpayers can then arrange to pay any tax due using Direct Payment Scheme, at a bank, via an electronic transfer or by cheque.

 The relevant form for the IHT account needs to be completed. This is called form IHT400. This can be downloaded from HMRC website or collected from a local court or registry. Your solicitor can assist or complete this form on your behalf when dealing with an estate that is in probate.

 Note, that even if inheritance tax is not payable and an estate is exempt then a person dealing with an estate must complete the relevant form IHT205 which confirms if an estate is exempt and that inheritance tax is not payable.

 Helpful Hints;

• It is important to remember to apply for the reference in good time. The HMRC recommend a period of at least three weeks. Any delay in obtaining the reference could delay in making the payment
• All inheritance forms can be completed online, the forms can be saved and returned to later to allow for extra information to be sought and extra time allowed.

HMRC published a helpful toolkit on 29 September 2010. This provides guidance on the errors that commonly occur. http://www.hmrc.gov.uk/agents/toolkits/iht.pdf

The Probate Process

When a loved one dies, before probate is granted, no one has the right or obligation to deal with the deceased’s estate.  Their assets and property cannot be dealt with until the Probate Registry grants a Grant of Representation giving legal authority to the Executor nominated in the deceased’s Will.

This assumes that the deceased did leave a Will, in which case the estate passed to whoever is named within it.  If no Will was written, then the Rules of Intestacy apply.

It is difficult to state with certainty how long the probate process will take.  This depends on a number of factors, such as how many assets there are, the type of those assets, and whether the supporting documents are readily available.  Generally speaking, the probate process does take some months.

The Executor’s duties;-

The Executor has certain duties, such as providing details of all the deceased’s assets and debts.  A tax return can then be prepared in respect of the estate.

Other executor’s duties are;-

• To inform relevant people of the death; next of kin, close family and those named in the Will as heirs.
• To inform relevant people, as above, of their role as Executor.
• To obtain the Will and carry out its contents.
• To register the death, if this has not been done.
• To make the funeral arrangements.
• To locate any beneficiaries.
• To make a list of all the deceased’s assets, locating all the necessary paperwork, such as bank statements, cheque/paying in books, building society passbooks, mortgage statements, credit card statements, stocks and share details, pension details, business accounts and any cash.
• To make sure the property is secure i.e. locking doors/windows and setting alarm.
• To obtain the death certificate.
• To locate any insurance policies i.e. life insurance, house insurance.
• To gather together all unpaid household bills and other debts, and then to ensure that those debts are paid by the estate by locating any creditors.
• To gather together all tax documents and wage slips.
• To complete and file any necessary tax return.
• To ensure that the net proceeds of the estate are distributed in accordance with the Will.

As you can see, the task of acting as Executor is very demanding and you may need specialist advice from a Probate & Estates Solicitor in order to carry out all the necessary duties.

You can be sure that our Probate & Estates Solicitor can provide you with guidance and support, taking away the problems sometimes faced by Executors, such as locating missing beneficiaries and filing the necessary tax return.

Call our Probate & Estates Solicitor, Stacey Phoenix, for free no-obligation legal advice.