THE BASICS EXPLAINED
What is Inheritance Tax (IHT) and when is it payable? IHT is a tax on the value of a person’s estate on death and on certain gifts made by an individual during their lifetime.
The extent to which your estate is charged IHT depends on your domicile status. According to the HMRC website the current rules are as follows:
- For Inheritance Tax purposes HMRC can treat someone who had their permanent home (“domicile”) abroad as if it was in the UK (known as “deemed domicile”) if they had either:
- had their permanent home in the UK at any time in the 3 years before they died
- been resident in the UK for at least 17 of the 20 Income Tax years up to their death
- If the deceased is deemed domiciled in the UK their estate has to pay UK Inheritance Tax on all their assets. If they aren’t deemed domiciled in the UK their estate:
- has to pay Inheritance Tax on their assets in the UK – except excluded assets
- will not have to pay UK Inheritance Tax on their assets outside the UK.
“Domicile” is a complex concept which is based on a long line of cases in the field of international law and specific advice on this issue may be required.
This guide concentrates on IHT due on a person’s death rather than during their lifetime and assumes that you are domiciled in England or Wales.
In calculating whether IHT is due on an estate, the first step is to value the estate, which includes:
- assets held in the deceased’s sole name – such as a house, possessions, money and investments – and deducting any debts the deceased may have owed, including household bills and funeral expenses
- the deceased’s share of any jointly owned assets
- the value of any assets held in trust
- any non-exempt gifts that the deceased may have made in their lifetime
- any assets they have given away, but kept an interest in (described as ‘gifts with reservation of benefit’).
In deciding whether or not tax is payable on an estate there are 2 allowances that must be taken into account.
The first is the basic tax free allowance or Nil Rate Band (NRB) that has been available since 2007. This is currently set at £325,000.
The second is the Residential Nil Rate Band (RNRB), which is being phased in from 2017 to 2020, and which applies to property ownership. In 2017 / 18 the RNRB allowance is £100,000. These rules are quite complex. You can find out more here.
If the net estate, as described above, is valued at or less than the total IHT tax free allowance (£325,000 in 2017 / 18, or £425,000 if RNRB can be applied), then no IHT will be due. If the net estate exceeds the available IHT tax free allowance, then tax is due on the excess amount at a rate of 40%, or 36% if the estate qualifies for a reduced rate as a result of a charitable donation of 10% of residue.
However, a surviving spouse or civil partner can effectively “inherit” the unused percentage of their deceased spouse’s or civil partner’s tax free allowance (both NRB and RNRB). So a deceased person may have up to twice the tax free allowance available to their estate on their death, which would currently amount to £850,000 if full RNRB relief is available , before IHT becomes an issue.
When is IHT payable on a deceased’s estate? In most cases, you must pay IHT within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding. You can pay by annual instalments over ten years if the value of the estate is tied up in property such as a house.