In life, there is nothing certain but death and taxes – and even on death there is still Inheritance Tax to pay

Archive 13.01.2016 Author: Robert Maas

Inheritance Tax (IHT) is actually a form of estate tax, not a tax in inheritances. It is payable on death and on some lifetime gifts.

Liability for IHT is based on domicile, not residence. The estate of a person who is resident in the UK but not domiciled here (or treated as domiciled here) is outside the scope of IHT except in relation to UK assets.

IHT is payable on the worldwide assets of a person who is UK domiciled (or treated as UK domiciled) at the time of his death and also on the UK assets of anyone who is domiciled elsewhere. It is at a flat rate of 40% of the excess of the value of the assets over £325,000. If a person leaves an interest in his main residence to his children or other descendants, an additional £175,000 is exempt (but only up to the value of his interest in the residence). In the case of a married couple (or civil partners), if the £325,000 and £175,000 allowances are not fully utilised on the death of the first to die, the balance can be used on that of the survivor.

There is no IHT on transfers between spouses or civil partners (including by way of legacy on death) unless the donor is non-UK domiciled, in which case the relief for the gift is restricted to £325,000. There are a number of reliefs. In particular there is a 100% relief (i.e. effectively an exemption) for shares in unquoted trading companies and agricultural land and woodlands. There are also a number of smaller exemptions.

IHT is not payable on lifetime gifts to an individual provided that the donor survives for seven years after making the gift. If he dies within that period, the gift is treated as being within his estate on his death, with some relief if he survives for more than three years and the gift is not fully covered by the £325,000 nil rate band. This exemption applies even if the donee is not UK domiciled or resident.

Other lifetime gifts, such as gifts to a company or to a settlement (including on the creation of a settlement) attract IHT at a rate of 20% of the excess over £325,000, with the tax being increased to 40% if the donor dies within the seven-year period.

A person who is not UK domiciled is nevertheless treated as being UK domiciled for IHT if either –

a) he has been UK resident at any time in 17 out of the previous 20 years (15 out of the previous 20 from 6 April 2017),

b) he ceased to be UK resident in one of the three previous years, or

c) from 6 April 2017, he was born in the UK, has a UK domicile of origin and is UK resident.

IHT is also payable by a trust created by a UK domiciled settlor (and in some cases by one treated as UK domiciled). The tax is on the assets in the trust at each ten-year anniversary of its creation. It is calculated under a complex formula and is a maximum of 6% of the value of the assets at that anniversary. IHT is also payable where assets leave a trust at the 6% rate pro-rated for the time the assets are in the trust since the last 10-year anniversary.

Some trusts in which a beneficiary has a life interest (or other interest in possession) are taxed differently, with the trust assets being treated as owned by the life tenant.

Further information

If you would like to discuss IHT further, or any other tax planning opportunities, please get in touch.

About the Author

Robert Maas

Tax Consultant +44 (0)20 7309 3800