Chapter 2 - The Charge To Tax

On Death

IHT is levied at 40% on the value of your worldwide taxable estate on death (assuming you are domiciled in the UK – see later notes  about domicile).

Your taxable estate at its simplest is made up of your: 

Assets (such as your home, property and investments)
+
any Life Insurance and Personal Pension Policies not in trust
+
your Interest in the Capital of Some Types of Trust
+
any Gifts Made in the Last Seven Years(less the £3,000 annual or other exemptions)
-
Funeral Expenses
-
Debts
=
ESTATE

Your assets include everything of value you own. This includes investments such as ISAs and TOISAs which you took out thinking they were tax-free. Now all the gains you made tax-free will suffer higher rate tax!

Your debts include all that you owe, including your mortgage, loans, hire purchase and credit cards. Note that many finance agreements are sold with in-built life cover so you need to add the life insurance element to your assets.

The liability for the tax on death is generally met by the executor or personal representative (that is, the person nominated to handle the affairs of the deceased person) and it is settled out of the assets of the estate. 

Until the tax is paid the Probate Registrar will not grant probate. There can be some exceptions to this rule and it is possible for the beneficiaries themselves to have to pay the tax. For example the recipient of a particular bequest is liable for the tax, although you can set up your will so that the bequest is paid net of tax. 

Any gifts in excess of the nil-rate band made within seven years of death will result in a tax charge on the recipient, unless the gift was specifically made net of tax. 

It is important to realise that IHT is charged in the UK on all your assets wherever they are. For example, it is not relevant that there is no IHT in the country where you have your holiday home. It is possible that overseas assets may be subject to the equivalent of IHT in the local jurisdiction.

IHT works differently if you are not domiciled in the UK. Domicile is  a complicated topic which is really outside the scope of this book, but  its broad meaning is your country of permanent residence. Domicile is acquired at birth and is difficult to change. If you are not domiciled in the UK, only your UK assets are liable for Inheritance Tax.  

Even if you are not domiciled in the UK you are treated (“deemed”) as if you were so domiciled for IHT purposes, if you were either:

• Domiciled here in the three years prior to making a transfer,
• Have been resident here for 17 out of the last 20 income tax years

The charge to tax - during lifetime

If you make payments into a trust you may have to pay a lifetime tax  charge of 20%. These issues are covered more fully in Chapter 11 “Trusts”. Prior to 22 March 2006 this affected only ‘discretionary’ trusts – but since 2006, nearly all trusts are affected. 

In addition, nearly all trusts set up after 22 March 2006 are now liable for  a periodic tax charge. This is levied every ten years at the rate of 30% of the lifetime rate-on the value of the trust which exceeds the then nil-rate band. In 2009/10 that rate is 20% so the periodic charge is 6%. This calculation is complicated and you will need to take advice in every case.  

Payment of tax on death

In most cases IHT has to be paid within six months of the end of the month of death. Interest in charged after this period.

The tax on land and building can be deferred and paid by half-yearly instalments over ten years.