Inheritance Tax (IHT)

Inheritance tax (IHT) is a one-off tax levied on the estate of a person who has died. In the tax year 2010-2011, Inheritance Tax is liable only for the estates that are valued over the threshold of £325,000 called Nil Rate Band. It means that you pay Inheritance Tax of 40% only on the amount above the current Nil Rate Band.

Married couple or civil partners can transfer their unused Nil Rate Band allowances to the surviving spouse or civil partner for use on their death, so that the Nil Rate Band for a married couple or civil partners can amount to £650,000. Inheritance tax (IHT) is paid by the executors, personal representatives or trustees authorized by a deceased person.

To calculate the amount of Inheritance Tax you must value a deceased person’s estate by adding up all his or her assets and then deducting all his or her debts, including household bills and funeral expenses. The valuation must also include the value of all gifts the deceased made up to seven years before death. The assets must be valued in the realistic market (selling) prices.

All in all, to calculate the Inheritance Tax due, you have to take the following steps:

• To work out the total value of the assets a deceased person owned and of the gifts he or she made within seven years before death.
• To work out the total value of the debts and liabilities of a deceased person.
• To deduct the total value of the debts and liabilities from the total value of the assets to establish the actual value of a deceased person’s estate.
• To calculate the actual amount of the Inheritance Tax due taking into consideration applicable Inheritance Tax thresholds and rates.
• To pay the Inheritance Tax to HM Revenue and Customs (HMRC).

To work out the total value of the estate owned by a deceased person, you must take into consideration the following assets:

• Money (cash) on current bank and buildings society accounts as well as on savings accounts or in other form;
• Investments such as shares and stocks as well as assets in trusts;
• Business assets;
• Foreign assets including money on foreign bank accounts, properties and shares;
• Houses, premises, land, including farmland and joint property;
• Personal belongings of value such as jewellery, antiques, art objects and other collectibles;
• Furniture, fixtures and fittings;
• Motor vehicles;
• Pensions and life insurance payouts.

Apart from that, all gifts made by a deceased person within 7 years before death, must be taken into account when calculating Inheritance Tax. These include:

• All assets, including cash and money transfers that the deceased gave as gifts in the 7 years before death;
• All assets that the deceased gave as gifts at any time, but in which he or she kept an interests such as a house given away for the right to live in rent-free;
• Gifts made for trusts.

The value of these gifts should be added back into the estate of a deceased person to calculate Inheritance Tax. However, in doing so, you have to consider that:

• The Inheritance Tax on such gifts and transfers is gradually reduced depending on how many years have passed since the gift was made.
• Some gifts and transfers are exempt from Inheritance Tax, including:
  – Gifts, payments and transfers in favour of your spouse and civil partner, as long as he or she permanently lives in the UK. If your spouse or civil partner is not UK domiciled, the lifetime exemption of Inheritance Tax is limited to £55,000. These regulations do not apply to the gifts made to unmarried or not registered partners.
  – Maintenance payments to your spouse, civil partner, ex-spouse, former civil partner, relatives dependent on you because of their old age or disability, and to your natural, adopted or step-children who are under 18 or in full-time education.
  – Donations to qualifying charities established in the EU and to national institutions such as museums, universities and the National Trust.
  – Donations to UK political parties.
  – Gifts worth up to £3,000 in each tax year. The unused portion of the previous year’s exemption can be carried forward but only for one year.
  – Wedding or civil partnership ceremony gifts, whereas there are different value limits for parents – £5,000 each, grandparents – £2,500 each and others – £1,000 each.
  – Small gifts up to the value of £250.
  – Regular gifts, payments and transfers, gifts for Christmas and birthdays or regular premium on life insurance policy paid on somebody else’s behalf.
  – Gifts and transfers made more than 7 years before death.

To deduct all liabilities and debts of a deceased person from his or her assets, you must usually take into account the following items:

• Outstanding mortgages;
• Bank and private loans, uncashed cheques and credit card balances;
• Bank and private loans, uncashed cheques and credit card balances;
• Household bills such as gas and electricity bills;
• Unpaid taxes such as Income Tax or Council Tax;
• Personal debts and liabilities,
• Gambling and guarantee debts;
• Funerals expenses.

If you have established the net value of a deceased person’s estate, you can calculate the Inheritance due to HM Revenue and Customs (HMRC). In general, Inheritance Tax (IHT) is only payable if the actual value of a deceased person’s estate is above the applicable IHT threshold. To put it another way, Inheritance Tax (IHT) is levied only on the amount above the applicable IHT threshold.

Business Property Relief (BPR) reduces Inheritance Tax (IHT) on transfers of certain types of business or business property, called “relevant business property”, provided the transferor has owned such assets throughout the two years immediately before the transfer. The current BPR rates (IHT reductions) are 100% and 50%. In practice, due to Business Property Relief (BPR), business owners do not pay Inheritance Tax (IHT).

Transfers of the following relevant business properties are entirely (100%) exempt from IHT:

• A whole business (Sole Trader) or an interest in a business (Partnership);
• Shares and securities of an unquoted company;

Transfers of the following relevant business properties are exempt from IHT at 50%:

• Shares and securities of a quoted company provided the transferor was in control of the company immediately before the transfer;
• Land, building, plant and machinery, which immediately before the transfer were used entirely or mainly for the business run by the transferor as a sole trader, partner of a partnership or by a company controlled by him or her.

The following business activities are not covered by Business Property Relief (BPR):

• Dealing in securities and shares;
• Dealing in buildings and land;
• Making or holding investments.

Capital Business Links Ltd provides a vast range of accounting and advisory services for beneficiaries, personal representatives and trustees dealing with Inheritance Tax (IHT). For more information or to arrange a meeting with one of our IHT consultants, please contact us on telephone number 0208 567 99 44 or at our e-mail address.