What is potentially taxable?
All of the assets owned by the deceased (including their share of any assets owned jointly), plus the value of assets held in trust less their liabilities at the date of their death, including funeral expenses, are potentially taxable. Also any gifts that the deceased made during the last 7 years of their lifetime may be taxable.
What are the main exemptions?
- Assets left to the spouse or civil partner of the deceased, as long as their permanent home is in the UK
- Gifts or bequests to a qualifying charity
- Certain assets used in a trading business if certain conditions are met
- Shares held by the deceased in a private company if certain conditions are met
- Ownership of a farm, woodland or national heritage property if certain conditions are met
Exemptions available on the second death of a spouse or civil partner
Where the spouse or civil partner of the deceased left part, or all of their estate to the deceased on their death, then part of their unused exempt threshold may be available to be used on the death of the second spouse or civil partner. A claim for the unused part to be transferred to the deceased estate must be made within 24 months of the death of the second spouse or civil partner. The amount available is calculated by applying the percentage of the unused threshold at the date of the first spouse or civil partner to the threshold applicable at the date of the second spouse or civil partner.
For example, the first spouse or civil partner left estate worth £400,000, made a non-exempt bequest of £160,000 and left the balance to their spouse or civil partner. At the date of their death the annual threshold was £300,000. The exempt amount is £240,000 which represents 80% so this percentage is applied to the threshold at the date of death of the second spouse or civil partner which in 2021/22 would be £325,000 x 80% = £260,000.
If a claim is being made for the transfer of all, or part, of the unused allowances of the spouse or civil partner that died first form IHT402 will need to be completed (available here). Regardless of whether you plan to apply for probate yourself or use a solicitor, the following information will need to be obtained:
- the date of death of the first spouse or civil partner
- the date of the marriage or civil partnership to the deceased
- the place of the marriage or civil partnership
- whether the first spouse or civil partner left a will – if so, a copy will need to be provided
- the net value of the estate passing on the death of the first spouse or civil partner
- whether the first spouse or civil partner left a will – if so, you will need to obtain a copy
- whether probate was obtained – if it was, you will need to provide a copy. If no probate was obtained then a death certificate will need to be provided
When completing form IHT402 you will also need to know:
- the IHT nil rate band in force at the date of death of the first spouse or civil partner
- the chargeable value of any gifts and other transfers made by the first spouse or civil partner in the 7 years before their death
- the value of any legacies passing under their will
Some of the above information may be difficult to find such as dates of marriage and details of the will and estate that was left. You can try asking other relatives if they know when the deceased married and searches can be made using
National archives of marriages and deaths here. There are many commercial sites which can trace deaths and marriages for a fee.
Government search site for wills and probate records here. Copies of records are available online and cost £1.50.
Reduced rate of Inheritance tax
A reduced rate of inheritance tax of 36% is available for estates which leave 10% or more of the taxable estate to charity.
The 10% of the estate would be calculated after deducting IHT exemptions such as the spouse exemption, reliefs such as business property relief and the nil rate band.
When is tax owed?
Inheritance Tax is due if the net value of the deceased’s estate is worth more than the Inheritance Tax threshold which for the tax year 2021/22 is £325,000. The tax is normally paid by the executor or the personal representative from the assets within the estate. The tax is calculated at 40% of the estate in excess of the threshold.
Inheritance Tax may also be due on gifts made during the lifetime of the deceased if those gifts were made less than 7 years before the deceased died. Under these circumstances the tax due on the gifts is paid by the recipient of the gift.
When is the tax payable?
Inheritance Tax is due 6 months from the end of the month in which a person died. Interest is charged on payments that are made late. It must be paid before you can apply for a Grant of Probate or Letters of Administration.
Under certain circumstances it is possible to pay Inheritance Tax by instalments. This normally applies when there are assets in the estate that can take time to sell such as land and buildings (including the house of the deceased), a business run for profit, certain shares and securities and agricultural land.
If for example there is a house in the estate that you intend to sell then only 10% of the Inheritance Tax is due by the 6 month deadline with the balance due 12 months later. If you intend to live in the house owned by the deceased then only 10% of tax is due by the 6 month deadline with a further 10% thereafter each year.
If Inheritance Tax is due on a lifetime gift and the subject of the gift is still owned at the date of the deceased’s death then any tax due on the gift can be paid in 10 equal annual instalments commencing on the normal date that Inheritance Tax would have been due.
The Residence Nil Rate Band (“RNRB”)
With effect for deaths occurring on or after 6 April 2017, a nil rate band for residences became available. For the full relief to be available the total estate must not exceed £2 million. If it exceeds this figure the relief will be reduced by £1 for every £2 that the estate exceeds £2 million. The £2 million figure includes the value of the home. The home can still be eligible for relief even if it is not lived in at the time of death, so long as it has been inhabited at some point by the deceased. The home must be inherited by a direct descendant. The relief started at £100,000 and was then increased by £25,000 each year to a maximum level of £175,000 by 2020/21.
Married couple and civil partners can each potentially benefit from the RNRB. Where the first spouse or civil partner has already died at 6 April 2017 the surviving spouse may be entitled to an increase in the RNRB if the person who died first has not used, or was not entitled to their full RNRB.
HMRC issued comprehensive guidance and example case studies showing how the RNRB will work in practice. Any unused RNRB can be transferred to the surviving spouse or civil partner in the same way that the nil rate band can be transferred if not fully used. If the value of the deceased’s share of the home passing on death is less than the RNRB the relief given is the lower of the RNRB and the value of the share of the home. Any unused element of the RNRB is available to the surviving spouse or civil partner. RNRB may also be available in the following situations:
- When only a share of the home is left to direct descendants with the balance to others
- When the home itself does not pass to direct descendants but is sold by the executors after death
- When the home is put into trust
- When the deceased downsized to a smaller home prior to death (either before or after 6 April 2017)
- When there is no home in the estate at the date of death, often because the deceased has moved into residential or nursing care.
With the introduction of this new relief, it may make sense to review wills and the way in which assets are currently owned. It also makes sense to ensure that full details of property owned or previously owned are recorded to assist the executors to know what relief may be available. This can often be difficult when dealing with the estate of a distant relative or friend and full details of their estate and affairs are not immediately available or known. As a minimum, details of property transactions should be recorded with dates of ownership, sale proceeds etc. For further details see the Blog on “Transferring the Nil Rate Band”.
HMRC have issued detailed guidance on the relief which can be seen here. There are also worked examples via case studies of different scenarios where the relief can be available which can be accessed here. The form to claim the Residence Nil Rate Band (form IHT 435) can be accessed here. If you are claiming unused Residence Nil Rate band you will require form IHT 436 – download here.