The statutory provisions for Inheritance Tax are contained in the Inheritance Tax Act 1984 [IHTA 1984] and subsequent Finance Acts [FA]. Its predecessor was called Capital Transfer Tax (CTT) and before that we had Estate Duty.
It may be charged on certain lifetime gifts (gifts into any trust apart from those for a disabled person); certain transfers into and out of trusts and on the value at the date of death of the estate of the deceased.
Inheritance Tax is a tax which seems to be universally hated. A tax on savings and prudence; a tax on inherited wealth which people hope to pass on to their children. With the growth in the number of people since WWII owning their own home successive governments have largely tried to avoid the taxation of the home on death. However, with the boom in property prices since 1997 the value of the NRB has fallen behind property price inflation making it much more likely that Inheritance Tax will be paid on the second spouse or civil partner's death.
Since 1986 when Inheritance Tax came in various schemes were invented to try and enable people to enjoy the use of their home without making a GROB. It became more and more attractive to try to use a scheme as property prices took the value of property well above the NRB threshold.
As a result HMRC were forced to take action to close down these schemes with the introduction of Pre-Owned Assets Tax in 2005.
Inheritance Tax has become something of a political football with the government introducing the concept of a transferable nil rate band on 9 October 2007 and the opposition promising to significantly increase the NRB threshold to £1 million to excuse most of middle England's houses from the tax.
Inheritance Tax is charged on the value transferred by a chargeable transfer. A chargeable transfer is one by an individual that is not an exempt transfer. A transfer of value is one that reduces the transferor's estate; it is not simply the value of what has been transferred but rather the amount by which the transferor's estate has been reduced or diminished by the transfer.
Husbands and wives and civil partners (from 5 December 2005) are chargeable to Inheritance Tax separately so each can make full use of individual exemptions and reliefs. Provided both spouses and partners are domiciled or deemed domiciled in a UK country then gifts between them are exempt.
All UK domiciled individuals are chargeable to Inheritance Tax on all their worldwide property. Non UK domiciled individuals are chargeable to Inheritance Tax in respect of their UK property only.
The tax is chronological and cumulative so a running total is kept of chargeable lifetime transfers. Once the total of lifetime transfers coupled with the value of the estate on death exceeds the 0% tax threshold then tax is chargeable on the excess at the rate of 40% (death rate) and 20% (lifetime rate). The value of the 0% band is known as the NIL RATE BAND (NRB) for the obvious reason that the rate of tax on that band of value is 0%. It is important to note that it is not an exemption but a 0% rate of tax.
The cumulative total is only relevant for seven years prior to death. Transfers are excluded from the running total outside that period - ss 1 - 8, Schedule 1 IHTA 1984 and s. 93 Finance Act 1997
Transfers for Inheritance Tax will be one of the following:
- Potentially Exempt Transfers
- Chargeable Transfers
- Exempt transfers
- Gifts with reservation of Benefit
There are a wide range of exemptions and reliefs. Exempt transfers are mostly straightforward and range from the annual exemption of £3,000 pa to normal expenditure out of income. Whereas the special reliefs for agricultural property (APR) and business assets (BPR) are wide ranging and complex.
Chargeable transfers occur also in the administration of trusts which are subject to the relevant property regime. The rates of tax applicable on the periodic and exit charges under that regime vary but will never be more than 6% on the basis of current law.
A tax on death?
On death the deceased is treated as making a final transfer of the whole of his estate immediately before death and the tax charged on the estate will depend upon the total of chargeable lifetime transfers and potentially exempt transfers within the previous 7 years - s.4 IHTA 1984.
The deceased's estate therefore comprises:
- Any assets held jointly;
- Capital of any trust fund in which the deceased had an interest in possession charged to tax under s. 49 (1) IHTA 1984
- Any PET which now becomes chargeable
- The value of any assets over which a gift with reservation of benefit applied at the time of death
The estate does not include the value of any excluded property i.e. property situated outside the UK if the deceased died domiciled outside the UK or any reversionary interests under a trust. Excluded property can therefore be transferred without any charge to Inheritance Tax even if the transferor dies within 7 years of making the transfer.
The liabilities of the deceased are taken into account in reducing the value of the transferor's estate on death.
Calculating the tax position on death involves the assessment of the liability of the deceased's estate to Inheritance Tax. Personal Representatives are required by s. 216 IHTA 1984 to deliver an account to the HMRC giving full details of the deceased's estate for Inheritance Tax purposes. It must be delivered within 12 months of the end of the month in which the deceased died or within 3 months beginning with the date when the Personal Representatives first acted as such if later. There are penalties for failure to deliver an Inheritance Tax 200/400 account and for making incorrect Returns. Interest runs on Inheritance Tax paid on or after the date six months from the end of the month of death.
Certain excepted estates do not need to submit an Inheritance Tax account to HMRC. Instead information is supplied to the Probate Registry on Inheritance Tax 205.
Inheritance Tax covers all aspects of a person's assets and family history and cannot be summarised in a short item such as this. Practitioners must regularly turn to the HMRC Inheritance Tax Manual which is a source of continually updated detailed information on the subject.
Practitioners should also be aware that as the estates of deceased persons can be handled by personal applicants and not just trained professionals HMRC have prepared a Customer Guide to Inheritance Tax. This is also available on their web site and the well informed client might well refer to it.
For more information on Inheritance Tax: http://www.hmrc.gov.uk/inheritancetax/