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Inheritance tax

 

After you die, the people tidying up your affairs (your Executors) have to count up the value of what you have left behind= Your Estate. They must deduct any debts and funeral expenses. Depending on how much is left, there may be inheritance tax  (IHT) to pay. IHT was introduced by the Inheritance Tax Act 1984. IHT applies when someone dies but it can also arise on lifetime transfers.

When is IHT charged?

IHT is charged on a ‘transfer of value’ which is a transaction that reduces the overall value of a person’s estate (S3(1)). The amount of this reduction in value is known as the ‘value transferred’. A transfer of value can be made in a person’s lifetime but the biggest transfer of value usually takes place when a person dies because on death there is a ‘deemed transfer of value’ affecting all the assets to which a person was beneficially entitled immediately before the death- the IHT estate.

Is there always an IHT charge?

Just because there is a transfer of value, it does not always mean that IHT is payable. For a charge to IHT, the transfer of value must be a chargeable transfer, defined by s2(1) of the IHTA 1984 as any transfer of value which is not an exempt transfer. A chargeable transfer includes a Potentially Exempt Transfer (PET) which has failed. So, broadly speaking, all transfers of value, whether made in a lifetime or on death, are chargeable unless they are covered by an exemption.

If there is a charge of IHT, how is the tax worked out?

Each individual has a nil-rate band, which is currently £325,000. This is the sum an individual can transfer without payment of IHT in any given 7 year period because any chargeable transfer within the nil-rate band is taxed at 0%. The rate for chargeable transfers in excess of the nil-rate band is 40% on death (20% for lifetime chargeable transfers). However, it is not necessarily that straightforward because to calculate tax on a particular transfer, whether during lifetime or on death, the process of cummulation must be used. This means that you must first look back over the 7 year period preceding the current transfer on which you want to work out the IHT tax. Any previous chargeable transfers made by the transfer or during that period must be taken into account, that is, cummulated, to determine how much of the nil-rate band (if any) is still available to set against the value of the current transfer.

There is an important rule that allows any nil-rate band not used on the death of a spouse/civil partner to be used on the surviving spouse/civil partner’s death. The rule applies if the surviving spouse/civil partner dies on or after 9 October 2007, regardless of when the first death occurred. This is referred to as the transferable nil-rate band and it can dramatically increase the nil-rate band on the survivor’s death and so reduce the IHT that would otherwise have been paid (or due).

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© Corinthians Law UK Ltd.

Member number - SU68092612/15

Registered in England and Wales Registration Number 09852533

Member of the Information Commissioners office Data Protection 1998 ZA151513

Legal Practitioner

Insured by Hiscox

© Corinthians Law UK Ltd.

Member number - SU68092612/15

Corinthians Law UK LTD
Taunton Will Writers
41 Leslie Ave
Taunton
Somerset
TA2 6JW
07401 137 373
01823 251 210
heretohelp@corinthianslawuk.co.uk