Techzone

Value of the estate

On death an individual is deemed to have made a transfer of value equal to the value of their estate immediately before death. Any qualifying debts and liabilities may be deducted along with reasonable funeral expenses.

For UK domiciled individuals, the estate is made up of all the deceased's assets wherever situated. A non-dom is only liable to IHT on assets that are situated in the UK.

Where the deceased had made lifetime transfers within the seven years before death which were either potentially exempt (PET) or immediately chargeable (CLT), these are also chargeable transfers and will be included within the deceased's estate. Any gifts made by the deceased at any time where there is a reservation of benefit are also included within the estate.

Trust interests

The estate includes not only the deceased's personal assets (their 'free estate') but also their interest as a beneficiary of certain trusts (their 'settled estate'). Trust interests which form part of a beneficiary's estate include:

• an absolute/bare trust
• an interest in possession (pre 22 March 2006)
• an immediate post death interest (IPDI)
• a transitional serial interest (TSI)
• a disabled person's interest

Exemptions

Certain transfers are exempt from IHT on death. These include:

• gifts between UK domiciled spouses and civil partners
• gifts to charities and political parties
• gifts for national benefit, such as to museums, universities, libraries or the National Trust

Impact of domicile

There is a reduced spousal exemption when a UK domiciled (or deemed domiciled) individual makes a gift to their non-UK domiciled spouse or civil partner. The exemption is limited to the amount of the nil rate band and is a cumulative total that applies to both lifetime transfers and those made on death.

Lifetime gifts in excess of this limit will be PETs and will be outside the estate if the UK domiciled spouse survives for seven years from the date of the gift. Gifts made to a non-dom spouse on death (including any failed PETs) which exceed the limit will be chargeable transfers and IHT will be payable if these exceed the available nil rate band.

Alternatively, the non-UK domiciled spouse can elect to be treated as UK domiciled for IHT purposes. This election allows them to use an unlimited spouse exemption but would mean that they become subject to UK IHT on their worldwide assets not just those in the situated in the UK.

Charitable legacies

As well as being exempt from IHT, charitable legacies can reduce the rate of IHT that applies to the rest of the estate. The rate of IHT on death will be reduced to 36% if the deceased leaves at least 10% of the baseline amount to charity. The baseline amount is broadly the value of the estate at death less the available nil rate band (excluding residence nil rate band), and any reliefs or exemptions, other than the value of the charitable legacy itself.

Nil rate band

Everyone that is subject to UK inheritance tax is entitled to a nil rate band on their death. In addition, for deaths after 5 April 2017 they may be entitled to a residence nil rate band of up to;

* Couple means individuals that are legally married or in a registered civil partnership. Any references in this document to spouses and marriage apply equally to civil partners and civil partnership.

The nil rate band of £325,000 and residential nil rate band of £175,000 have been fixed at these amounts until April 2030.

Transferable nil rate band

Since 9 October 2007, the estate of the last to die can benefit from any unused proportion of the nil rate band of the first of the couple to die. These provisions will apply regardless of when the first spouse died.

It is important to note that an increased nil rate band cannot be used in conjunction with lifetime transfers. Also, it can only be claimed by the personal representatives of the second spouse to die.

How much is transferable?

The amount of IHT nil rate band that can be transferred is the proportion unused by the first spouse to die. Personal representatives therefore need to know:

• the nil rate band at the time of the first death
• details of transfers in the seven years prior to death
• distributions on death

HMRC have published historic nil rate band figures dating back to 1914.

The entire estate is not always left to the surviving spouse. The will may direct gifts to non-exempt beneficiaries such as, children or a discretionary trust. In these situations, the amount of the unused nil rate band may be less than 100%, or possibly nothing if such gifts exceed the nil rate band on the first death.

In addition, any chargeable lifetime transfers (including failed potentially exempt transfers) made in the seven years before the first death, would reduce the amount of nil rate band available for transfer.

If the value of the estate on first death was below the available nil rate band at that time, the excess is not lost. It is still the proportion of the unused nil rate band that is available for transfer to the survivor.

Surviving more than one spouse

Any unused IHT nil rate band of a deceased spouse (A) can still be transferred to the estate of the surviving spouse (B), even if B subsequently remarries.

If the surviving spouse (B) then outlives their new partner (C), they could also make use of any of C's unused nil rate band. On the other hand, if their new spouse (C) survives B, it is possible for C's personal representatives to make a claim for the unused nil rate band from the first deceased spouse (A), if it hadn't previously been claimed.

However, the maximum that can be added to anyone's own nil rate band is 100% of the nil rate band applicable on the date of death.

Factors that can reduce the transferable NRB

• Assets left to anyone other than the surviving spouse, for example children
• Any discretionary trusts created under the will
• Any non-exempt lifetime gifts the deceased made in the seven years before their death. For example, outright gifts and gifts into trust
• Jointly owned assets that pass by survivorship to someone other than surviving spouse
• Any assets/property given away at any time but where the settlor retained an interest (a gift with reservation)
• The value of an interest in possession held in a pre 22 March 2006 trust (one which has not become subject to the 'relevant property' rules). For example, an interest held by the main beneficiary (also known as the 'default' or 'principal' beneficiary) under a typical life company flexible trust

How to claim

When the first spouse dies, nothing needs to be done in terms of making a claim to transfer any unused IHT nil rate band. However, it would be prudent at this time to gather the relevant information and documents necessary, otherwise it could be difficult to make the claim in the future.

The actual claim to transfer the unused nil rate band must be made by the personal representatives of the surviving spouse. They should complete HMRC form IHT402 and return this with form IHT400, within 2 years from the date of death. HMRC will normally require the following documents from the first death:

• a copy of the grant of representation (Confirmation in Scotland) - or if no grant was taken out, a copy of the death certificate
• a copy of the Will
• a copy of any Deed of Variation or similar documents in relation to the estate

Residence nil rate band

An additional IHT nil rate band is available where the family home is inherited by children or grandchildren on deaths after 5 April 2017. However, the additional nil rate band cannot be used against lifetime transfers made within seven years of death.

The residence nil rate band (RNRB) is transferable (similar to the main nil rate band) between spouses and civil partners.

The maximum RNRB is currently £175,000.

Anyone with a net * estate over £2M will begin to see their RNRB reduced by £1 for £2 until it's completely lost once the estate is over £2.35M or £2.7M where someone has inherited a full RNRB from a deceased spouse or civil partner.

It will only apply to transfers to children and grandchildren and their spouses. Those without children will miss out. And it's not possible to use the exemption for lifetime transfers

Clients who could benefit from the RNRB may need to revisit their existing wills to ensure they continue to reflect their wishes and remain as tax efficient as possible.

The * net estate is the value after deducting any debts, including an outstanding mortgages or those incurred by equity release, but excluding IHT exemptions such as spousal exemption or BPR, now known as Business Relief, on qualifying assets.

Outstanding debts through mortgages or equity release could also affect the amount of RNRB available if they reduce the net value of the home below the maximum RNRB.

Who can benefit?

The extra nil rate band is fully available to anyone who:

• passes the family home to 'direct descendants' - broadly their children/grandchildren and/or their spouses on death, or
• had a family home, then downsized on or after 8 July 2015 (passing on assets of equivalent value to children/grandchildren),
• and has an estate below £2M.

The legal personal representatives (LPRs) claim and must check that these conditions are met.

Meeting the RNRB conditions

1) Eligible property

To claim the RNRB, there must be an eligible property that is left to direct descendants on death (unless downsizing provisions apply, see below). In the majority of cases, this will be a property that at some point has been the home of the deceased. The individual does not have to be living there at the time of their death. For example, if they have moved into residential care and the property has been let out, it will remain eligible for the RNRB as long as all other conditions are met.

Where there is more than one eligible property in the estate, the LPRs can choose to nominate which one can use the RNRB. Only one property can be nominated in this way. Any surplus RNRB cannot be set against another property in the estate (although if there was a surviving spouse it could always be brought forward as part of their RNRB).

2) Direct descendants

Children, grandchildren and their spouses are the most common examples of 'direct descendants'. However, foster, adopted, wards and step-children may also be included.

Brothers, sisters, nephews and nieces of the deceased are not direct descendants. If a property is left wholly to one of these family members, then no RNRB is available.

Where a property is left in part to a direct descendant and in part to, for example, a nephew or niece, the maximum RNRB will be capped at the value of the part of the property left to the 'direct descendant'.

3) Leaving a property

The RNRB is only available when a property (or other assets when downsizing provisions apply) included in the deceased's estate is left to direct descendants.

Directly

The estate can claim the RNRB if the property is left as a specific bequest to children and grandchildren. The estate can still claim the RNRB if the LPRs sell the property and give the children/grandchildren the cash rather than transferring the ownership of the property.

It may also be available where the children/grandchildren are entitled to a share of the residue of the estate which includes the value of the property. If the residue is to be shared between beneficiaries, the property is deemed to be inherited in those proportions.

However, the RNRB amount may be restricted if the total value of the property shares forming part of the direct descendants entitlements to the residue is less than the maximum RNRB amount. This could be the case if part of the residue passes to beneficiaries who are not direct descendants.

In a trust

The RNRB is available where a property or share of a property is left to a 'direct descendant' as a beneficiary of one of the following trusts:

• IPDI
• Bereaved Minor's Trust and 18-25 trust (set up for children on death of parents)
• Disabled trust
• Absolute trust

Where an IPDI trust has been set up and the surviving spouse has the interest-in-possession, the residential nil rate band of the deceased spouse will be brought forward and will be available to the estate of the life tenant as long as the property is then left to the life tenant's direct descendants.

The RNRB isn't available where the property is left to a discretionary trust. This is because the eventual destination of the property is at the trustees' discretion. This is the case even if the potential beneficiaries of the trust are children or grandchildren. Although leaving a property to a discretionary trust on death does not use the RNRB a surviving spouse may be able to claim the unused amount under the transferable nil rate band rules so long as their property is being left to direct descendants.

Where property has been left to a discretionary trust on death but it would be preferable to claim the residential nil rate band, it is possible to unwind the trust by paying the trust assets to the beneficiaries. This must be done within two years of death. The property will then be treated as directly inherited by the beneficiaries and the RNRB can be claimed.

A common estate planning strategy for married couples and civil partners is to include a discretionary trust within the will to accept assets up to the nil rate band on the first death. This was especially popular prior to the introduction of transferable nil rate bands.

Often, rather than transfer a share of the family home in to the trust, the trustees may accept an IOU or take a charge against the property to be repaid on the second death. This allowed the surviving spouse to retain outright ownership of the property. It also means that the RNRB can be transferred to the surviving spouse if the property is to pass to direct descendants on the second death.

4) The value of the estate and the taper reduction

The wealthiest estates may not be able to benefit from the residential nil rate band. Estates worth over £2M will start to lose the RNRB, with it being withdrawn at a rate of £1 for every £2 over £2M. The taper test is applied on each death, including those before 6 April 2017.

It is not the value for IHT which is used to test whether tapering applies. The value will also include certain assets and transfers which may be exempt from IHT. These include:

• property passing to the spouse
• assets qualifying for business property relief or agricultural relief

However, for tapering purposes the value of lifetime gifts are excluded, even if made in the seven years immediately before death. This allows gifts right up to the point of death to bring the value used for tapering below the £2M threshold.

Transferability of residence nil rate band

Any unused RNRB can be used on the death of a surviving spouse with similar rules to those that apply to the main IHT NRB. The estates of widows and widowers will be able to claim any unused RNRB from their deceased spouse or civil partner even if the first death occurred prior to its introduction.

There is no restriction on when the first death occurred but the second death must be after 5 April 2017. The legal personal representatives must claim any transferable NRB within two years of the second death.

If the first spouse dies before 6 April 2017, it's assumed that they had a full 100% unused RNRB regardless of whether they had a share in a qualifying property or it passed to a direct descendant. However, the allowance will still be tapered where the first spouse's estate was greater than £2M. Any tapering is applied to a fixed RNRB of £100,000 so there will be no transferable RNRB if the estate on first death exceeds £2.2M.

If the first spouse dies after 5 April 2017, any unused RNRB is transferable unless the estate is large enough for the taper to apply. Again, there's no requirement for the first spouse to have owned a share in a qualifying property or to have passed it to a direct descendant.

Downsizing provisions

The full RNRB may not be able available if the deceased had downsized prior to their death or if they no longer owned a qualifying property. But the estate may be able to claim a downsizing addition to make up for the amount of RNRB which has been lost.

The downsizing addition is available where:

• the deceased sold, gave away or downsized their home after 7 July 2015,
• the former home would have qualified for the RNRB if it had been retained until death, and
• direct descendants inherit at least part of the estate.

Where the deceased purchased a lower value property, this new residence must pass to direct descendants for the downsizing addition to apply. If only part of the home is left to the children/grandchildren, then the available RNRB will be calculated on the value of that part.

Generally the downsizing addition will be the amount of the RNRB which has been lost as a result of the disposal of the property.

Home is sold or given away

Where a home is sold or given away there will be no qualifying property to benefit from the RNRB. However, it's still possible to apply for a downsizing addition.

Where property is gifted rather sold before death that will be a PET. The recipient may be subject to IHT if the value of the gifted property is greater than the available nil rate bands.

How to claim

The residence nil rate band (including downsizing additions) is claimed using form IHT435. Any transfer of unused RNRB from a deceased spouse or civil partner is claimed using form IHT436.

HMRC provide an online calculator to determine the amount of any additional IHT nil rate band.

IHT reliefs on death

Business relief

Business relief, formerly known as business property relief or BPR, is available for transfers on death of business property that has been owned by the deceased for at least two years.

100% relief is available for:

• a business or interest in a business (includes sole traders and partnerships)
• a holding of shares in an unquoted company (including Alternative Investment Market (AIM) companies)

50% relief is available for:

• controlling holding of shares in a quoted company (more than 50% of the voting rights)
• land, buildings or plant and machinery used in a business of which the deceased was a partner at the date of death or used by a company controlled by the deceased

BPR is not available if a business consists wholly or mainly of dealing in securities, stocks and shares, land or buildings, or making or holding investments, including shares in a company which carries on such a business. This generally includes landlords with (commercial or residential) property for rent.

Agricultural relief

Agricultural relief, formerly agricultural property relief (APR), is available for transfers of relevant property made on death. The deceased must have owned it for two years before death or seven years if it is property that is let out to someone else for agricultural purposes. The relief is usually given at a rate of 100% but may only be at 50% if the agricultural property was rented out before 1 September 1995.

Agricultural property is land or pasture that is used to grow crops or to rear animals intensively. It can also include stud farms, farm buildings, farm cottages and farmhouses.

Farm equipment and machinery, harvested crops and livestock do not qualify for relief.

From 6 April 2024 agricultural property relief is restricted to assets only situated in the UK.

Taper relief

Inheritance tax taper relief may reduce the amount of inheritance tax payable on lifetime gifts where:

• death occurs between three and seven years from the date of the gift, and
• the value of the gift when added to any previous chargeable transfers in the previous seven years, exceeds the nil rate band (NRB) in the year of death.

Where IHT is payable on lifetime gifts taper relief may apply based on the following scale:

Remember that taper relief reduces the tax payable and not the value of the gift. This means gifts which are below the available nil rate band will not benefit from taper relief.

Quick succession relief

Quick succession relief (QSR) can be claimed where an estate includes assets received within the previous five years under an earlier transfer on which IHT was (or becomes) payable. This includes failed PETs, gifts with reservation (GWR) and immediate post death interests (IPDI).

There is no relief where the earlier transfer was fully covered by an exemption such as spousal or business relief.

The aim of the relief is to prevent IHT being charged on the same assets twice in a short period of time. The relief is calculated based upon the tax paid (or payable) on the earlier transfer and is reduced on a sliding percentage scale for each year that has passed since the earlier transfer.

However, the amount of relief may need to be adjusted to reflect the fact that the tax on the earlier transfer was calculated on the gross transfer and the amout received by the second estate may be net of tax.

The formula for QSR can be summarised as;

Tax on the earlier transfer x appropriate percentage (see table) x (Net increase in the second estate/Gross value of the original transfer)

Often, a specific gift in a will may be described as being free of IHT, with the IHT liability being born by other gifts made from the residue of the estate. Quick succession relief is still available even though the gift is to be made without the deduction of tax.

In these circumstances, to calculate the amount of tax on the earlier transfer, all non-exempt transfers (i.e. ignoring gifts to spouses and business relief etc) are aggregated and each is deemed to have a proportionate share of the overall IHT bill attaching to it. The final part of the QSR calculation can also be ignored as increase in the second estate will mirror the value of the transfer.

Reporting and payment of IHT after death

Following death the legal personal representatives will normally have to complete an IHT account (IHT400). There are various other IHT forms which may need to be completed. For example, form IHT402 enables an estate to claim any unused IHT threshold from a previously deceased spouse or civil partner. Form IHT435 is needed to claim residence nil rate band whilst IHT436 is for transfers of unused RNRB. IHT409 relates to pension benefits (not State Pension) and IHT410 to give details of life assurance policies and annuities.

The time limit for delivering the account is:

• twelve months from the end of the month in which the death occurs, or
• if later, three months from the date when the personal representatives first acted in that capacity.

Excepted estates

An excepted estate is one where no inheritance tax is due and a full IHT400 account is not required, therefore simplifying and speeding up the administration of the estate.

There are three types of excepted estate:

Low value estates

• Where no IHT is payable as value of estate is below the nil rate band.

Exempt estates

• Where no IHT is payable as either the spouse/civil partner exemption or charity exemption has been utilised, and
• The gross value of the estate does not exceed £3M. This was 1M for deaths before 1 January 2022

Estates of non-UK domiciled individuals

• The deceased was never domiciled or deemed domiciled in the UK, and
• The deceased's UK assets were under £150,000.

For deaths on or after 6 April 2010, an estate will also be an excepted estate if both of the following apply:

• The value of the estate is less than twice the IHT nil rate band, and
• The entire nil rate band from a late spouse or civil partner can be transferred to the deceased.

The personal representatives of someone who is UK domiciled will still be required to complete the full IHT400 account if any of the following conditions apply:

• the estate includes more than one trust
• the value of trust assets exceed £250,000 (£150,000 for deaths before 1 January 2022)
• the estate includes foreign assets of more than £100,000
• there have been lifetime transfers within seven years of death of more than £250,000 (£150,000 for deaths bfeore 1 January 2022.
• there has been a gift with reservation
• the estate includes a charge for Alternatively Secured Pension (ASP)
• the deceased was deemed domicile in the UK
• the deceased had a life assurance plan which paid out to someone else but not their spouse or civil partner
• the deceased had a personal pension where full retirement benefits were not taken when in poor health

Where lifetime gifts have been made that are being claimed as normal expenditure from income, these must be included as part of the estate in determining whether or not a full IHT account is required.

Payment of IHT

IHT is due to be paid six months after the end of the month of death. For example, if the date of death is 6 January then IHT is due by 31 July.

If the legal personal representatives submit their IHT account before this date the IHT must be paid with the delivery of the account.

Although the tax is paid from the estate, the personal representatives may need to borrow money to pay it. This is because they will not normally be able to access funds without a grant of probate or letters of administration. However, the personal representatives can access the deceased's bank or building society accounts before probate is granted if it is to pay the inheritance tax. This can reduce the costs of administering the estate. The estate cannot normally be distributed to beneficiaries until the IHT has been paid.

Paying by instalments

In some circumstances it is possible to pay the IHT due by instalments. For example, where the asset transferred is land or, in some cases, a business interest. A claim must be made by the taxpayer. Where instalments are permitted, the period is usually over ten years and interest is charged. It may not be possible to distribute all of the assets to the beneficiaries until the last instalment has been paid. The outstanding tax becomes payable immediately if the assets are sold.

Loss on the sale of shares

IHT relief may be available where shares are sold during the administration period and their market value has fallen since the date of death. It applies to the sale of listed shares, including unit trusts and OEICs, within 12 months of death. There is no relief available for disposals of unquoted or AIM listed shares.

Inheritance tax is recalculated by substituting the sale proceeds for the value at the date of death. The relief is claimed by completing an IHT 35 form by those responsible for paying the IHT bill;

1. the legal personal representatives, or
2. the trustees of a qualifying interest in possession trust (in which the deceased held the IIP)

There is generally no relief if shares are transferred into the beneficiary's name rather than sold. This is the case where shares transferred form part of the residue of the estate, i.e. broadly the remainder of the estate after tax and any specific legacies are paid.

However, the transfer of shares to a beneficiary may be treated as a sale where a beneficiary is entitled to a fixed cash sum from the estate and the will requires the beneficiary's consent to receive shares to the value of their inheritance rather than the cash.

While generally there is only relief available if the shares are sold during the 12 months since death there are special rules for shares which have become unsaleable:

• shares which are cancelled during this period are deemed to have been sold for £1.
• shares which become suspended will deem to have been sold at the end of the 12 month period for the value at that time.

Rules exist to prevent personal representatives selling shares at a loss and subsequently repurchasing the same or alternative listed shares between the date of death and two months after the last of the shares are sold. Relief is restricted based on the proportion of the sale proceeds which are reinvested, e.g. if 50% of the sale proceeds are used to purchase fresh shares only half the loss is available as relief against IHT. It is not possible for the estate to benefit from both this IHT relief and claim a capital loss for CGT. This is prevented by the value used for inheritance tax being treated as the base cost of the asset for CGT purposes.

Who pays the IHT following death?

The primary responsibility for the payment of IHT following an individual's death is as follows:

* These are the personal assets that come into the hands of the PRs.

** Where the deceased had an interest in a trust that forms part of their estate. This would include a qualifying interest in possession.