Tax - Inheritance

IHT

IHT is payable by reference to an individual’s domicile and the situs of assets. UK-domiciled individuals (actual or deemed) are subject to IHT on their assets worldwide (subject to any applicable double tax treaty relief). Generally, non-UK domiciled individuals are only liable to IHT on their UK situs assets as non-UK situs assets are treated as excluded property for inheritance tax purposes. With effect from 6 April 2017, UK residential property held by non-UK domiciled individuals through certain offshore entities (typically an offshore company) has been brought within the scope of IHT.

On an individual’s death, IHT is payable at 40 per cent on the value of any property he or she then owned or is deemed to have owned that exceeds the available nil-rate band, at present £325,000. The residence nil-rate band (RNRB) for ‘qualifying residential interests’ (usually the family home, but certainly one that has at some point been a residence of the deceased) left to one or more of a specified class of lineal descendants is available for estates valued below a specified threshold if the deceased died on or after 6 April 2017.

The RNRB takes, or has taken effect, as follows:

• £100,000 in tax year 2017-2018;
• £125,000 in tax year 2018-2019;
• £150,000 in tax year 2019-2020; and
• £175,000 in tax year 2020-2021.

It will then increase in line with the Consumer Prices Index from tax year 2021-2022 onwards. It is possible to transfer any unused RNRB to a surviving spouse or civil partner, as is the case with the original nil-rate band (see below).

There is a tapered withdrawal of the RNRB for estates with a net value of more than £2 million at a withdrawal rate of £1 for every £2 over this threshold. Accordingly, in tax year 2020-2021, estates valued at £2.35 million or more are unable to take advantage of the RNRB.

Provision has also been made for situations where the deceased downsized or ceased to own a residence before death.

IHT may also be payable on property the deceased gave away within the seven years preceding death to the extent that the value of such gifts and the estate of the deceased together exceed the nil-rate band available at his or her death. Taper relief reduces IHT liability in respect of gifts made between three and seven years before death.

In addition to his or her own nil-rate band, if the deceased survived his or her spouse or civil partner, and the nil-rate band of the first of the spouses or civil partners to die was not entirely used up at their death, any unused nil-rate band may be claimed, generally by the deceased’s personal representatives (PRs), and added to the deceased’s own nil-rate band to reduce the IHT payable on his or her estate. This is known as the transferable nil-rate band and, as mentioned above, also applies to the RNRB, where relevant.

A number of IHT reliefs and exemptions exist, which include:

• legacies to a spouse or civil partner: generally, such legacies are fully exempt from IHT. However, this exemption is limited to the annual nil-rate band, at present £325,000, on a transfer of assets to the non-domiciled spouse or civil partner of a UK-domiciled individual. However, it is possible for a non-UK domiciled spouse (or, where relevant, their PRs on their behalf) to elect to be treated as being UK-domiciled for IHT purposes, in which case he or she will be entitled to the full spouse exemption. At the same time, however, his or her estate will be chargeable to IHT in the same way as any other UK-domiciled individual;
• an exemption for legacies to charity;
• business property relief and agricultural property relief, which may apply at 50 per cent or 100 per cent on relevant business or agricultural assets;
• an annual exemption of £3,000;
• gifts in consideration of marriage or civil partnership, the value of which varies between £1,000 and £5,000 depending on the relationship between the donor and recipient;
• an annual exemption for small gifts to any one person not exceeding £250 (provided that person does not also benefit from the whole or part of the £3,000 exemption); and
• normal expenditure out of income: regular gifts made out of surplus income may be made tax-free. Regularity does not mean the amount has to be the same each year; the test is that such a gift does not adversely affect the donor’s standard of living.

A conditional exemption on heritage property is a deferral of tax available on land, buildings, any collection or individual picture, book, manuscript, work of art or scientific object; or anything else the Secretary of State considers pre-eminent for its national, scientific, historic, or artistic interest. To claim the relief, the owner must undertake to HMRC that they will (1) keep the object in the UK; (2) ensure that it is adequately preserved; and (3) allow 'reasonable public access' the definition of which must be agreed with HMRC.

Additionally, outright gifts that the donor survives by at least seven years are potentially exempt from IHT.

Care must be taken with lifetime gifts to ensure that the donor does not continue to benefit from the asset transferred, for example, by continuing to live rent-free in a house he or she has given away. If the donor does continue to benefit in such a way, the asset remains in his or her estate. Such gifts are referred to as ‘gifts with a reservation of benefit’.

Liabilities of a deceased may generally be deducted from the assets of his or her estate before calculating IHT due. However, rules introduced in 2013 limit such deductions in certain situations. These include restrictions to the deductibility of liabilities attributable to financing the acquisition of, or the maintenance or enhancement of, the value of excluded property or of relievable property (ie, business property, agricultural property or woodlands), and of liabilities that are not discharged on or after death, other than in certain specified circumstances.

Other taxes

On death, there is a tax-free uplift to market value of the deceased’s assets for CGT purposes, so that there is no tax liability on their deemed disposal on death.

CGT and income tax will be payable by the PRs of the deceased on any gains realised or income accruing during the administration of the estate.

England & Wales Guide

The England & Wales guide answers the principal questions for Private Clients relating to the law in this jurisdiction.