Inheritance Tax (IHT) is the tax on the estate of someone who has died. This includes all property, money, possessions and any other assets. It can also apply to certain transfers into Trust and to the property held by certain Trusts.
When do individuals have to pay Inheritance Tax?
Not everyone is required to pay inheritance tax upon their death, however, if the value of the estate is worth more than the available Nil Rate Band (NRB) of £325,000*, part of it could be liable to tax. The NRB can be reduced during your life by the value of gifts you make.
There is additionally a main residence nil rate band that will be available to some taxpayers which will be worth an additional £175,000 from 6 April 2020.
You might also have to pay Inheritance Tax during your lifetime if you transfer money or assets into a trust. Gifts to individuals are called Potentially Exempt Transfers. This is because they will be exempt from Inheritance tax provided you survive seven years from the date of the gift.
Certain assets are not subject to inheritance tax because of the attract Business Property Relief or Agricultural Property Relief.
What is the Inheritance Tax Rate?
The standard Inheritance Tax rate is 40% (and is only charged on the value of the estate is above the NRB threshold).
If you decide to leave 10% or more of the ‘net value’ of your assets to a charity in your will, then the estate can pay a reduced Inheritance Tax Rate of 36%.
Who pays the tax to the HMRC?
The funds from your estate, which are dealt with by the person managing them (called ‘the executor’, if there’s a will).
If you give away more than £325,000 in gifts and then die within 7 years, the people you give the gifts to might have to pay Inheritance Tax.
In the case of Trusts this would be the trustees.
Interaction with US gift and estate taxes
US citizens are also subject to US gift and estate taxes. The US estate tax rate is also 40% but it only applies if the value of your estate exceeds your available exemption which, if unused during your lifetime, would currently stand at $11.58m (2020).
The US estate tax exemption is so high that most estates will not be caught. Compare that with the UK exemption, the Nil Rate Band, which is only £325,000. For US citizens this means their UK inheritance tax planning may be much more important.
The US also has a gift tax regime. This means that when you make gifts to individuals in excess of an annual exclusion (2020: $15,000) you have to file a gift tax return. The value of the gift in excess of the annual exclusion starts to use up your lifetime estate tax exemption.
How can we help?
With over 35 years of experience, Ingleton Partners can help maximise the inheritance you leave to your heirs. We can provide you with professional support in:
- Reviewing your IHT position
- Considering assets that you own overseas
- UK non-domiciled enquiries
- Managing assets to reduce IHT liability
- Trusts or personal investment companies
*The Nil Rate Band (NRB) of £325,000 is fixed until 2021