UK Inheritance Tax – The Basics

Jane Cooper 19 January, 2017

UK Inheritance Tax (IHT) has been an increasing tax burden for many estates in recent years, primarily as a result of the increasing value of property in the UK .

While IHT is a relatively complex tax, in this posting we aim to set out some of the basic principles which underpin the computation of the tax payable.

The first point to note is that Inheritance Tax is primarily a tax on the estate of someone who has died.

There is normally no Inheritance Tax to pay if the value of the deceased’s estate is less than the nil rate band, which is currently £325,000, or the deceased leaves estate worth more than the nil rate band to a spouse or civil partner – so long as s/he is domiciled in the UK (see our separate posting on the subject of residence and domicile) –  to a charity, or to a community amateur sports club.

When the IHT nil rate band is unused upon the death of an individual it can be transferred to a surviving spouse or civil partner and used upon the second death to reduce the value of the estate that is chargeable to IHT.

Subject to the availability of any further reliefs or exemptions IHT is then charged on the estate at 40%.

Some or all of the IHT payable on the estate is often to be remitted to HM Revenue & Customs before probate is granted.

Note: Obtaining probate is the precursor to the executor/s of an estate being in a position to manage or administer the assets of the estate in accordance with the provisions of the deceased’s Will.

The process of obtaining probate usually requires the executor/s to obtain information about the deceased’s estate, leading to the completion and submission of a number of forms, prior to the swearing of an oath, and the grant of representation.

Payment of some or all of any IHT liability on the deceased’s estate is often required before probate is granted.   This process can be facilitated through the submission of HM Revenue & Customs form IHT423.

A Residence Nil Rate Band (RNRB) is being introduced in addition to the £325,000 nil rate band from the start of the 2017/18 UK tax year.

An estate will be entitled to the RNRB if:

  • An individual dies on or after 6 April 2017
  • The deceased owns a home – or a share of one – and it s included in their estate
  • The individual’s direct descendants – eg children or grandchildren – inherit the residence (or a share of it)
  • The value of the estate is not more than £2 million

An estate will also be entitled to the RNRB when an individual has downsized to a less valuable home, or has sold or given away their home after the 7th of July, 2015.

The amount of the RNRB will be:

  • £100,000 where the death occurs in tax year 2017/18
  • £125,000 in 2018/19
  • £150,000 in 2019/20
  • £175,000 in 2020/21 to 2021

For later years, the maximum RNRB will increase in line with inflation (based on the Consumer Prices Index).

Any unused RNRB when someone dies can be transferred to the deceased’s spouse or civil partner’s estate. This is available if the first of the couple died before the 6th of April, 2017, even though the RNRB was not available at the time of the first death.

Planning to mitigate the impact of IHT often involves a consideration by an individual whose estate will give rise to an IHT liability upon death of:

  • Making gifts – also known as Potentially Exempt Transfers, or PETs – to individuals who will benefit in any event under the provisions of the Will.  Where the person making the gift – the donor – survives for at least 7 years there will be no tax payable on the gift.  Where the donor survives for more than 3 years but less than 7 years from the date of making the gift the value of the gift is included in the estate, but the IHT payable is reduced by way of a tapering relief.   It should be noted that IHT arising on a gift is usually payable by the person receiving the gift, but the IHT exposure can be managed if the donor arranges a Deed of Gift, with instructions for the estate to pay any IHT that might arise should the donor not survive for 7 years.
  • Making regular transfers of monies that can reasonably be considered to be normal expenditure out of income.   Such amounts are not part of the estate of the deceased.  Care needs to be exercised here – and documentation should be arranged during the lifetime of the person making the gift – to ensure that any challenge from HM Revenue is capable of being rebutted.
  • Moving to a jurisdiction in the world other the UK, and taking steps to become non domiciled: for such persons only UK based estate  is subject to UK Inheritance Tax.  The subject of domicile is discussed in a separate article.   For now we simply highlight that domicile is a more enduring attribute than residence – individuals can remain domiciled in the UK for many years after ceasing to be a resident.

If you are moving to Australia – or are moving to the UK – and wish to explore the steps you can take to mitigate your UK Inheritance Tax exposure please complete the enquiry form on this page.   We will be delighted to explore the issues with you, and how we might advise.