Inheritance Tax

There is a special exemption from Inheritance Tax for cash gifts made on or shortly before the date that the relevant wedding or civil partnership ceremony takes place.

The amount of tax relief varies depending on the relationship between the donor and the recipient.

• Each parent (including step-parents) can gift up to £5,000 tax free
• Grandparents and Great grandparents can each gift up to £2,500
• Any other person can each gift up to £1,000

If the value transferred by the gift is more than the amount of the available exemption, it is an exempt transfer up to the amount of the available exemption, and the excess is chargeable.

There is also a separate, general annual exemption of £3,000 for gifts. This exemption can be carried forward if not used to make a maximum gift of £6,000. These gifts are ignored in the event of the donor’s demise within 7 years of making the gift.

There are also exemptions for normal gifts out of income such as making birthday gifts. A donor can also give as many gifts of up to £250 per person as they want during the tax year but only if they haven’t used another exemption on the same person.

Newly married couples should be advised that there is no IHT to pay on lifetime gifts between spouses or civil partners as long as they live together in the UK.

The Inheritance Tax residence nil-rate band (RNRB) came into effect on 6 April 2017. The 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 RNRB effectively increases your existing £325,000 inheritance tax nil-rate band.

The RNRB is being introduced in stages, the threshold is currently £150,000 and will increase to £175,000 in 2020-21. After this, the limit is set to increase in line with the Consumer Prices Index. Any unused portion of the RNRB can be transferred to a surviving spouse or partner in a similar way to the existing NRB.

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 by 2020-21, parents will be able to pass on property worth up to £1 million free of Inheritance Tax to their direct descendants.

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.

Planning note

If your estate exceeds these extended nil-rate band limits, you should consider a formal Inheritance Tax planning exercise. There are ways to mitigate liabilities and we can advise.

There are special rules concerning the liability to IHT of a transfer made during a person's lifetime. For example, most gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'.  The gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within three years of making the gift, then the IHT position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

IHT can also be chargeable if the person making the gift retains some 'enjoyment' of the gift made: for example, where an elderly person gifts their home to their children (who usually live elsewhere) and continues to live in the house rent-free. In this case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to IHT even if the taxpayer dies more than seven years after the transfer.

In addition, transfers into most types of discretionary trusts, those involving companies and transfers into most types of interest in possession trusts are immediately chargeable transfers for IHT purposes.

Domicile is a general legal concept which in basic terms is taken to mean the country where you permanently belong. However, determining domicile status can be complex. HMRC guidance states that domicile cannot be defined precisely, but the concept rests on various basic principles.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, many factors are considered, for example, the location of family, property and business interests.

There is also a concept in the UK of deemed domicile whereby under rules introduced from 6 April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years, will be deemed to be domiciled in the UK for tax purposes. This would make them liable to Inheritance Tax (IHT) on their worldwide assets.

IHT is generally chargeable to people domiciled (or deemed domiciled) in the UK or with assets sited in the UK. For example, HMRC’s manual states that if someone creates a settlement with assets outside the UK, when they are not domiciled in the UK, the settlement could be excluded from the charge to IHT. There are also many double tax agreements that can, depending on the circumstances change a person's liability to IHT.

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. If this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to inheritance tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted. We would be happy to help you understand what options are available to reduce your liability to inheritance tax whilst at the same time protecting your assets.

If a permanent home (domicile) is in the UK then any foreign situated property owned at date of death will be chargeable to Inheritance Tax. The site of an asset is usually the place where the asset in question is considered to be located for legal purposes. The site of immovable property is the place or country where the property is situated.

Certain assets are excluded from the charge to Inheritance Tax if the taxpayer was not domiciled in the UK at the date of the transfer, regardless of where the assets are. Any claim to Inheritance Tax can be affected by the way assets outside the UK devolve, even when the taxpayer is domiciled in the UK. For example, the foreign country may have different legal rules for property held jointly or on trust.

Although domicile can change, there is generally a presumption in favour of the continuation of an existing domicile. To change a domicile, many factors are taken into account, for example, the location family, property and business interests. There is also the UK concept  of deemed domicile, whereby under new rules introduced from 6 April 2017, any person who has been resident in the UK for more than 15 of the previous 20 years will be deemed to be domiciled in the UK for tax purposes.

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. Currently, no tax is payable when a person’s estate is worth £325,000 or less.

Certain business assets may be exempt

There are a number of reliefs available that can reduce liability to IHT if you inherit the estate of someone who had died. One of these reliefs is known as 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.

• 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
  – 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.

The question of whether or not Business Relief is available can be complex and we would recommend that business owners pay attention to the facts to ensure their descendants IHT bill is as low as possible. We can of course help review the facts and advise accordingly.

There is an annual Inheritance Tax exemption of £3,000 for gifts. This exemption can also be carried forward to the following tax year if not used to make a maximum gift of £6,000. You can also give unlimited individual gifts of up to £250 per person during the tax year, but only if you haven’t used another exemption on the same person. There are additional, special allowances for gifts made at a wedding or civil ceremony.

Use the following relief to exempt regular financial support to your family

It is also possible for wealthier taxpayers to make tax exempt gifts and payments that are paid as normal expenditure out of income. This is a very flexible exemption from IHT as there are no specific requirements such as having to make fixed regular gifts to the same person. With proper planning this can be a very useful tool. For example, to enable 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 ensure that they are left with enough money to maintain their normal standard of living out of their regular income after making the gift.

If you are unsure if your family arrangements are covered by this relief from IHT, please call for further advice.

If you inherit property, money or shares 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 to the heirs.

There is normally no tax to be paid by the deceased’s estate if the value of the estate is below the IHT nil rate threshold of £325,000. There is also an IHT main residence nil-rate band (RNRB) that was introduced in April 2017. The RNRB will ultimately allow for a £175,000 per person transferable allowance for married couples and civil partners when their qualifying main residence is passed down to children after their death. The RNRB is in addition to the £325,000 IHT threshold.

If you receive an inheritance, you will be liable to Income Tax on any profit earned after the inheritance, such as dividends from shares. You may also need to pay Capital Gains Tax (CGT) on any increase in value on assets after the date of inheritance, if the same assets are sold or otherwise disposed of.

The main exception is if you received a gift during a person’s lifetime. These lifetime transfers are known as Potentially Exempt Transfers (PETs). These gifts or transfers achieve their potential of becoming exempt from IHT if the taxpayer survives for more than seven years after making the gift. If the person making the gift dies within 3 years of making the gift, then IHT is payable as if the gift was made on death.

A tapered relief is available if death occurs between three and seven years after the gift is made. There are insurance products such as a seven-year term assurance policy that can be used to reduce the amount of IHT due should the taxpayer pass away within seven years of making a gift. You may also have to pay IHT if your inheritance was put into a trust and the trust can’t or won’t pay any tax due.

Most gifts made during a person’s life are not subject to tax at the time of the gift. These lifetime transfers are known as ‘potentially exempt transfers’ or ‘PETs’. These gifts or transfers achieve their potential of becoming exempt if the taxpayer survives for more than seven years after making the gift. If the taxpayer dies within 3 years of making the gift, then the Inheritance Tax position is as if the gift was made on death. A tapered relief is available if death occurs between three and seven years after the gift is made.

A transfer of a property where the estate of another individual is increased may still be treated as a gift to an individual provided two conditions are satisfied. These are that the property does not become comprised in the estate of another person (not ‘individual’), but the estate of another individual is increased.

HMRC’s internal Inheritance Tax manual provides the following example to illustrate this point: Christina owes Penelope, a parent, £50,000. Penelope forgives the debt. This is a transfer of value since the value of Penelope’s estate is diminished by the disposition. This transfer can potentially be a PET.

Planning note

It would seem good practice to keep a list of any PETs that clients make. It is also important to keep a record of any exemptions that are used as well as details of any regular gifts made out of surplus income.