Inheritance Tax Planning

Inheritance Tax is paid on the value of a person’s estate when they die. “Estate” includes property, money, personal possessions, business assets and so on. The tax is calculated on the value of the estate once all of the asset values have been established and liabilities have been deducted.

Not everyone pays Inheritance Tax and since the introduction of the transferable nil rate band (for married couples and civil partners) effective from 9th October 2007, the amount of people falling within the Inheritance Tax net has reduced.

Who Pays Inheritance Tax?

Inheritance Tax is only payable if the taxable value of your estate (including your share of any joint assets) when you die is in excess of a threshold at which it becomes payable. It is payable at a rate of 40% of the value over this limit. The threshold at which tax becomes payable is known as the “nil rate band”. The threshold is currently £325,000 and in the Budget on 24th March 2010 it was announced that it would be frozen at this figure until 5th April 2015.

There are a number of exemptions which allow amounts to be passed on death without Inheritance Tax being due, for example:

  • Transfers between spouses/registered civil partners, if domiciled in the UK, are fully exempt, whatever the value
  • Most gifts made over seven years ago
  • Certain gifts on death, i.e. charitable
  • Additionally certain types of asset may attract favourable Inheritance Tax treatment. See our sections on business property relief and agricultural property relief for more information.

What Is The Transferable Nil Rate Band?

The transferable nil rate band potentially increases the amount of the estate which may pass free of Inheritance Tax. It arises when one party to a marriage or civil partnership dies and the amount of their estate chargeable to Inheritance Tax does not use up all of the nil rate band. Where this happens, the unused proportion can be transferred to the surviving spouse or civil partner who dies on or after 9th October 2007.

As transfers between spouses/civil partners are exempt from Inheritance Tax if, for example, a husband leaves everything to his wife on his death, he will not have used any of his nil rate band (assuming that he has not made any chargeable lifetime gifts). Therefore 100% of the nil rate band can be transferred to the wife’s estate on her death so she will therefore have her own nil rate band doubled by inheriting her husband’s.

The calculation works by looking at the proportion of the nil rate band used on the first death and then increasing the survivor’s nil rate band by that proportion.

For example, a husband dies when the Nil-Rate Band is £325,000. He leaves one quarter of his estate to his children (£81,250) and the remainder to his wife. As a result, 25% of the nil rate band has been used upon his death.

Let us suppose the wife dies when the nil rate band is £400,000. The amount available to be transferred to the wife from the husband will be £300,000 (being 75% of the current nil rate band of £400,000 as he used 25% upon his death). The wife’s nil rate band is therefore enhanced to £700,000.

Who Pays The Tax?

In the majority of cases the personal representatives of the estate pay the Inheritance Tax from the estate. The personal representatives are either the executors of the will or if there is no will, the Administrator who is appointed by the Court when Letters of Administration are granted.

When Is The Tax Payable By?

Inheritance Tax must be paid within six months from the end of the month in which the death occurs otherwise interest is generally charged on the amount outstanding. Inheritance Tax on some assets, i.e. real property, can be paid in installments over a period of ten years.

Are There Things I Can Do To Reduce My Inheritance Tax Liability?

Yes, there are various sorts of planning available in lifetime and upon death to reduce a person’s Inheritance Tax position. As each client’s needs are different, an appointment with one of our specialist lawyers is recommended to discuss the options available to you.

Greg Baker
Partner, Head of the Wills, Trusts and Probate Department
01733 295616
Probate and Estate Administration, Wills, Trusts & Wealth Management
Jo Wild
Associate Solicitor
01780 750952
Probate and Estate Administration, Wills, Trusts & Wealth Management
Andrea Beesley-Hewitt
Associate Solicitor
01733 295552
Probate and Estate Administration, Wills, Trusts & Wealth Management
Emma Carter
01733 295608
Probate and Estate Administration, Wills, Trusts & Wealth Management
Claire Clarke
01572 725774
Probate and Estate Administration, Wills, Trusts & Wealth Management
Diane Baker
Probate Assistant
01733 295663
Probate and Estate Administration, Wills, Trusts & Wealth Management