Inheritance Tax Instalments
Inheritance Tax is a tax charged on the assets of someone who has died, these may include:
- Belongings (vehicles, jewellery etc)
- other personal wealth but can exclude life-policies if set up appropriately and typically will not include pensions
If that person had left a Will then this will identify gifts to be handed down to a beneficiary. If the deceased did not leave a valid Will then the Intestacy Rules may apply and identify the beneficiaries of the estate.
The rate of Inheritance Tax is typically 40% on the value over the Nil-Rate Band (an amount of the value which is taxed at 0% - the ‘nil’ rate). The Nil-Rate Band is currently £325,000 but this is reduced by any unrelieved gifts given in the 7 years before death. Where there have been substantial gifts in those 7 years it may mean that there is no Nil-Rate Band available to the estate. The Government introduced an additional Nil-Rate Band in 2017 called the Residence Nil-Rate Band and this can provide up to another £175,000 that is taxed at 0% where qualifying conditions are met (most commonly by leaving a home to descendants).
There are some assets on which Inheritance Tax is not charged such as certain business assets for example. Gifts to some beneficiaries are also relieved for Inheritance Tax such as spouses/civil partners and charities.
Does Residence, Domicile or Citizenship affect Inheritance Tax?
Inheritance Tax applies to all assets held by someone in the UK at their death and, for people domiciled in the UK (usually where the UK is their home) Inheritance Tax is charged on their worldwide assets. The law around domicile and location of assets can be complex and you may want to speak to a lawyer to see how the UK tax may affect you in the event of your death. It is common for people to own properties in multiple jurisdictions these days and seeking specialist advice can help to alleviate some surprises.
The UK does not tax individuals based on citizenship but there is a distinction between residency and domicile. Residency is largely where someone lives for a period of time and Domicile is largely where someone’s home is located. There are lots of nuances and pitfalls around this though so specialist advice is often critical when discussing Inheritance Tax.
The United Kingdom comprises England, Scotland, Wales and Northern Ireland. Whilst the Inheritance Tax applies across all of these countries, there are differing jurisdictions for inheritance; with England and Wales sharing the same courts whilst Scotland and Northern Ireland have a different regime.
Who Pays Inheritance Tax?
The starting point for Inheritance Tax is that it is paid before the assets are distributed – it is paid by the estate. However, as with many things around private client law, this is only the starting point. A Will can determine the assets from which tax is paid and how this is shared across the estate. This can be very important when there are multiple gifts including those to a spouse, charities and other as each gift will have differing tax implications. If someone has given generously during their last 7 years and gifted more than their Nil-Rate Band (currently £325,000) then it is possible that tax will be charged on those gifts and based on the order in which they were given. The tax on these gifts will, as a starting point, be payable by the recipients of the gifts.
By way of an example, if a parent gave £200,000 to each of their two children on different days (assuming a Nil-Rate Band of £325,000), the child who received their gift first will not be liable to pay Inheritance Tax, irrespective of the timing of the parent’s death. The second child though would potentially be liable to pay Inheritance Tax (up to £30,000 in this case) if their parent died within 7 years of the gift.
It can be very easy to overlook these implications and children are not always in a position to agree to adjust things later to rebalance the tax. A Will can address the liability for tax in this situation and should be something that is considered as part of wider estate planning.
How Are Inheritance Taxes Calculated?
There are a few stages to run through when calculating Inheritance Tax.
Firstly, understanding the scope of assets within the tax (for instance, a non-UK domiciled individual may only have Inheritance Tax charged on their UK assets).
Secondly, the assets are valued and any reliefs associated with the assets are identified. For instance, certain business or farming assets may be relieved from inheritance tax or pay a different rate.
Thirdly, the beneficiaries are identified. There are certain beneficiaries where their gifts are relieved from tax such as spouses, charities, certain political parties etc. Charitable gifts of the right amount may also cause the rate of inheritance tax to be reduced from 40% to 36% on the whole of the estate.
Finally, the pre-death gifts are considered along with the available Nil-Rate Bands. With the Residence Nil-Rate Band, a gift of certain assets to descendants may provide an additional Nil-Rate Band to the estate. There may also have been a former spouse or civil partner who died before the deceased, potentially allowing some of their unused Nil-Rate Bands to be brought forward.
With some examples:
- UK domiciled spouse leaving everything to a UK domiciled spouse – providing there were no gifts in the previous 7 years, there would not be any Inheritance Tax charged. If the pre-death gifts exceeded the Nil-Rate Band (£325,000) then tax would be charged to the people who received those gifts.
- The second spouse to die, with an estate of £1m including a house worth £500,000 and leaving everything to the two children and without having made gifts in the past 7 years. Here, potentially up to £1m may be passed to the children before inheritance tax.
- An unmarried couple where each of them owns £500,000, without having given gifts in the past 7 years. On the first death everything passes to the survivor and, on the second death everything passes to their children. Here there would be up to £70,000 of Inheritance Tax on the first death and up to £172,000 on the second death. However, careful planning and good advice can reduce or completely avoid the tax.
Who Is Exempt to Inheritance Tax?
There are some instances where you may be exempt from paying inheritance tax. If you want to preserve your estate prior to your death, some of the following methods may be used to limit the amount of inheritance tax to be paid or to exempt your estate altogether. Some instances where you would be exempt from inheritance tax include:
- Leaving your entire estate to your spouse or civil partner will exempt your estate from inheritance tax. This will not always apply where one spouse is UK domiciled and the other is not.
- Money left to charity is not subject to inheritance tax. If you leave more than 10% of your chargeable estate to charity, your tax percentage rate can also decrease to 36%. The threshold of 10% of the chargeable estate will depend upon various factors and it is sometimes the case where tax can be reduced overall, leaving non-charitable beneficiaries with more inheritance by increasing a gift to charity.
- Some business assets may be eligible for a 50-100% reduction in tax.
- Some sensible lifetime planning may be undertaken to reduce the value of the estate. At its simplest, certain lifetime gifts are exempt for Inheritance Tax such as gifts of up to £3,000 per tax year. It is also possible to make regular gifts of any amount where it comes from income. Seek legal advice if you are in question as to what may be taxable. Much of this depends on the circumstances, the amount of the gift, the purpose of the gift, when it is given, and to whom it is given.
Can I Pay Inheritance Tax in Instalments?
The short answer is yes, depending upon the assets.
Normally, inheritance tax is payable in full at the end of the sixth month following a person’s death since it takes time to calculate assets, comply with the formalities of the tax reporting and obtaining a Grant of Representation from the court and then obtaining funds to pay the tax to be paid. A beneficiary may not want to sell the assets in order to pay tax and this is usually where the instalment option is helpful. It may also not be a good time to sell and waiting for a period may yield a higher value.
The person assigned to manage the settlement of the estate, also known as the executor or administrator, will be responsible for settling all debts and making the payment for any inheritance tax from the account of the deceased.
In the event that there are assets that take time to sell, inheritance tax on certain assets may be paid in equal annual instalments over a period of 10 years. Once the assets subject to the instalment options have been sold or transferred, taxes must be paid in full.
Some things that can be paid in instalments include:
- Land and buildings
- Certain Shares and securities. These will typically be unlisted shares such as in a limited company or controlling shares where someone owns more than 50% of the voting rights.
- Business or partnership interests (these are often relieved for Inheritance Tax but where there is tax charged in whole or part, instalments may be paid)
- Gifts of buildings, business shares or securities, all or part of a business. Where the gifts are given before death and still owned by the recipient at the time of death.
Instalments will also typically require interest on each payment. Paying early is one way to avoid paying interest, so as assets are sold, making larger payments towards the final balance can save money in the long run for the estate. Certain gifts (largely agricultural land or trading business interests) allow for interest free instalments.
The use of a trust can be a useful way to
keep your estate and assets within your family following your death. Trusts can
be used to help with tax where control over the assets is required. There is
often a misunderstanding that trusts are a form of panacea when it comes to
Inheritance Tax and that is rarely the case. There are some circumstances where
trusts can reduce tax and offer a lot of control, this is especially the case
with Wills. However, whilst tax planning is often at the forefront of people’s
minds, there are many considerations other than tax that are important to
consider such as cost, complexity and the difficulty in 'undoing’ arrangements
if the law should change. Trusts should generally only arise as a result of
some specialist advice – it is not unusual for people to make their situation
(including the tax) dramatically worse by implementing trusts without some
Contact us to arrange your complimentary initial consultation with one of our legal expertsBook your consultation today