The Death Tax And How To Avoid It, (Part 2).

(The following article brings to a conclusion the Blog on Inheritance Tax started last week. If you haven’t already read it, you can find it immediately below this Blog)

Gifts with reservation.

Property that a donor has given away is treated as still belonging to the donor for IHT purposes if the donor continues to enjoy a benefit from the property. Examples of gifts with reservation are a donor giving away:

  • A house, but continuing to live in it.
  • A painting, but leaving it on his/her own sitting room wall.
  • A sum of money, but continuing to receive interest on it.
  • A freehold interest in land where the donor retains a lease and the lease was granted or acquired less than seven years before the gift.

If the donor still retains a benefit in the gift at death its value is treated as remaining part of the donor’s estate and taxed accordingly which may result in a double IHT charge. Gifts with reservation should generally be avoided.

Reliefs.

A relief reduces the value of a transfer in certain circumstances. In theory, it does not remove the transfer from the tax regime. However, if relief is at 100%, the practical effect is to make the transaction exempt. The main reliefs are:

  • Business property relief – is a relief for transfers of business property. The property has to be owned for two years before the transfer qualifies as business property. It is important to note that not all businesses qualify and professional advice should be sought in these circumstances.
  • Agricultural property relief – includes agricultural land, growing crops and farm buildings but not the animals or equipment. The relief is given on the agricultural value of the land but not any development value and does not include any buildings on their own. Professional advice should be sought in these circumstances.
  • Relief for woodlands – is a special relief for growing timber in the UK or European Economic Area. Professional advice should be sought in these circumstances.

Can nil rate bands be combined?

Nil rate bands can be combined, up to £650,000, for spouses and civil partners – unfortunately you cannot combine your allowance with whoever you please!

If your other half dies and leaves everything to you – all their possession and their half of the house – then the estate becomes exempt from IHT  (remember transfer of estate between spouses is tax exempt). It doesn’t matter how much is passed on as long as the person receiving the assets has their permanent home in the UK.

This means that your other half didn’t have to use their nil rate band of £325,000 and so it can be passed to you. If your spouse has assets that they did not leave to you then you will receive their allowance minus the value of those assets.

On the death of the second spouse, you, your loved ones whom you leave your estate to will benefit from the use of two nil rate bands – meaning an estate of £650,000 (if the second spouse receives the deceased spouse’s full allowance) and therefore no IHT charge.

How do I transfer a nil rate band?

The nil rate band is not transferred on the first death of a couple, but on the second death. The family or beneficiary of the estate must apply for a transfer from HMRC.

In order to be able to apply for a transfer, the second death must have been after 2007 although it doesn’t matter when the first death was – even if it was 10 years ago, the nil rate band will be calculated as the current allowance.

To transfer a nil rate band, you will need:

  • A copy of the will of the second person who died.
  • A copy of the grant of probate (known in Scotland as confirmation) or the death certificate if there is no grant.
  • Any deed of variations that are attached to the original will.
  • You will also need to fill in HMRC form IHT217 and send it with the above documents. You may need to fill in additional forms depending on the value of the estate and how much of the first nil rate band is being transferred.

A claim to transfer must be made within 24 months from the end of the month in which the second person died.

If there is an IHT bill, who pays it?

If there is IHT to pay to HMRC, it is typically paid by the executor of the deceased person’s will or their personal representative.

The IHT bill is paid from the funds of the estate and must be paid with six months from the end of the month of the person’s death. If you fail to pay the bill in this time HMRC will begin to add interest to the amount owing.

IHT can, however, be paid in instalments over a 10 year period if arranged with HMRC. This is usually when land and property assets have been left.

Note: even if there is no IHT due you will be asked to fill out a form for HMRC, this is done as part of the probate process, (known as confirmation in Scotland).