Hello, My name is Adrian Chambers and I’m a solicitor with Law for Life.Â Welcome to our web pages relating to Estate Administration.Â If you have suffered the loss of a loved one and need help in administering their estate and in obtaining Probate then we can help.
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I WANT TO KNOW ABOUT INHERITANCE TAX
Welcome to our Law for Life web pages on Estate Administration.Obtaining a Grant of Probate can be time consuming,Â complicatedÂ and of course emotionally difficult.
I WANT TO KNOW MORE ABOUT INHERITANCE TAX
Inheritance Tax is covered by the Inheritance Tax Act 1984. It is effectively a tax payable on peoplesâ estates when they die. The first Â£325,000 (as at April 2011) net value of a deceased person’s estate falls within the nil rate band, which is not taxable. Any balance remaining is then taxed at the rate of 40%.
Generally speaking, there are a number of things that can be done to try and reduce the payment of Inheritance TaxÂ on an estate. This guide is designed only to provide a summary of the law in relation to Inheritance Tax.
HOW TO CALCULATE IF INHERITANCE TAX IS PAYABLEÂ In order to assess whether an estate might be subject to Inheritance TaxÂ you must work out how much the deceased’s estate is worth. This means calculating the value of the deceased’s assets and deducting their debts to roughly assess the net value of their assets.
You also need to add in any gifts or transfers of money the deceased may have made in the 7 years prior to death and include them into the value of the Inheritance Tax calculation. If you calculate that the net total value of the deceased’s assets, including any gifts/transfers in the 7 years before death, is under the Â£325,000 (April 2011) Nil Rate Band threshold, then no Inheritance TaxÂ will be payable.
If the net value of the deceased’s estate is over the Nil Rate Band limit then you should seek professional legal advice as Inheritance TaxÂ will be payable. We can help, click here to contact us.
INLAND REVENUE INHERITANCE TAX ACCOUNTÂ The Personal Representatives of the deceased’s estate are responsible for arranging to pay any Inheritance TaxÂ on the estate. An Inheritance TaxÂ account must be sent to the Inland Revenue with full details within 3 months from a Personal Representative first acting or within 12 months from death whichever is the later.
REDUCING THE PAYMENT OF INHERITANCE TAX Â Generally speaking, there are a number of things that can be done to try and reduce the payment of inheritance tax. However, it is quite a complicated area of law and needs some very careful thought and planning. These are listed below.
SPOUSE EXEMPTIONÂ If a deceased person is married with children and leaves the whole of their estate and assets to their spouse, then there would not be any inheritance tax payable on the first death. This is by virtue of there being a âspouse exemptionâ.
It is therefore only on the second death when the assets are transferred to the children and other beneficiaries, that an inheritance tax bill can potentially arise.
TRANSFER OF NIL RATE BANDÂ The Nil Rate Band â which is currently Â£325,000.00 per individual is now transferable. The estate of a surviving spouse or civil partner is able to benefit from any unused Inheritance Tax Nil rate band of their deceased spouse or partner. This applied on the death of a surviving spouse or partner after 8 October 2007, regardless of when the first death occurred.
The amount of the nil rate band available for transfer is based on the proportion of the nil rate band that was unused when the first spouse or partner died. The unused proportion will be applied to the amount of the nil rate band in force at the date of the surviving spouse or partnerâs death.
For example, Mr A dies today leaving his children Â£108,333 (i.e. one third of the current nil rate band) with the rest of his estate passing to his wife. On Mrs Aâs subsequent death, her nil rate band will then be increased by two thirds. So, if the nil rate band at the time of Mrs Aâs death is Â£360,000, she will be able to leave Â£600,000 free of inheritance tax, i.e. Â£360,000 plus Â£240,000 (two thirds of Â£360,000). If a person marries more than once, the nil rate band of the survivor can only be increased by a maximum of 100%.
POTENTIALLY EXEMPT TRANSFERS Â Sometimes the deceased will have made gifts and transfers during their lifetime. For a gift to be exempt from inheritance tax the person making the gift must live for more than seven years from the date of the gift. Otherwise, inheritance tax is payable on the transfer.
The Â inheritance taxÂ payable on the gift reduces on a sliding scale only if it was made between three and seven years prior to death. After the third year the tax paid on an inheritance tax liability such as this, reduces to 32%. It then continues to taper by 8% each year for the seven year period. If the person making the gift dies before three years has elapsed, no inheritance tax benefits are gained at all and the full tax amount is payable.
POST DEATH VARIATIONS Â Post Death Variations can be made as to the distribution of Estates, whether there is a will or intestacy, in order to save on the payment of inheritance tax. It is essential that all the adult beneficiaries must agree to any post death variations. Variations to childrenâs entitlement under an estate can be made but usually the courts approval is required. Legal advice should be obtained before making any post death variations.
For example, if the deceased’s net estate was worth approximately Â£400,000 and the deceased was not married then normally a balance of inheritance tax of Â£30,000 would be payable (based at 40% on the Â£75,000 over the Â£325,000 Nil Rate Exempt limit). However if a post death variation of the deceased’s estate took place using a deed of variationÂ whereby Â£75,000 was given to charity then that would reduce the value of the deceased’s estate down to Â£325,000 and no inheritance tax would be payable.
NON-BUSINESS ASSETS RELIEF Â These include shareholding and investments in unquoted companies, including certain stocks listed on the Alternative Investment Market. These are free of inheritance tax if the deceased held them for at least two years.
BUSINESS PROPERTY RELIEF Â Most types of business can qualify for business property relief. The only restrictions are for businesses whose main activity is dealing in stocks and shares, land, buildings or various other investments. The extent of the relief will depend on the type of company involved.
If the deceased operated a business as a sole trader or a partner in a partnership then the estate should qualify for 100% relief, meaning the business assets are disregarded for inheritance tax. A lower 50% rate of business relief applies to a controlling holding in a fully quoted company. This applies to people who have control of the majority of voting powers on all questions affecting the company.
AGRICULTURAL LAND Â Any farmland or forestry owned by working farmers can be left without any inheritance tax liabilities as long as it has been owned for at least two years. If the farmland or buildings have been let, they are treated as Potentially Exempt Transfers and you must survive for seven years in order for the property to be passed inheritance tax free.
WRITTEN INTO TRUST Â It may well be that there are some insurance or life policies or pensions that have been âwritten into trustâ and they would not be added into an estate and would be exempt when calculating the inheritance tax. Often it is possible during a personâs lifetime to take out a Life Policy to cover and pay the cost of any potential inheritance tax bill.
OTHER INHERITANCE TAX EXEMPTIONSÂ To try and save on some inheritance tax you might want to consider entering into a deed of variationÂ so that a proportion of the deceased’s assets are given to the following organisations without inheritance tax being payable on the amount of the gift:
Gifts to Charities
Donations to Political Parties
Gifts to National Museums, Universities and National Trust Donations of National Heritage property to certain non-profit making bodies
Gifts of land to Registered Housing Associations.
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