Inheritance tax is the proportion of your assets that goes to the state on your death. It may also be due on certain gifts that you make during your lifetime or on assets which are held in trust. These latter gifts are known as Potentially Exempt Transfers (PET's). This rule was made largely to prevent people from giving away all their assets shortly before they die.
Inheritance tax applies to:
Death – the value of your assets which exceeds the tax-free allowance (the nil rate band) As at October 2022 this is a tax free allowance of £325,000, with an additional £175,000 also potentially available where you own a property at the time of death and gift that to direct descendants.
Certain lifetime gifts – for example, gifts to certain trusts and companies, gifts by close companies and an alteration of share capital by close companies.
Trust property – inheritance tax charges may also arise when property is held in trust. One example is when assets left in a Will are held in trust for children beyond the age of 18.
Who pays the Inheritance Tax?
Your Executors or personal representatives will pay the inheritance tax due on your death, using assets from your estate. It needs to be paid by the end of the calendar month six months following your death. So, if you die on 15th March, the inheritance tax due on your estate must be paid by 30th September. Interest is charged if the payment is late.
Paying in instalments
There are some types of assets which can take time to sell and so it can be difficult to pay the inheritance tax due on them within six months. With this in mind, HMRC allow inheritance tax to be paid in ten equal instalments over a period of ten years. This applies to a number of different types of assets:
houses;
shares and securities;
businesses; and
agricultural land and property.
Any outstanding inheritance tax due must be paid in full if the asset in question is sold.
Inheritance tax forms
Your Executors will need to complete an inheritance form (in addition to the probate application form). This is the case even if there is no inheritance tax to pay in respect of your estate.
There are two different inheritance tax forms depending on how much your estate is worth:
If your estate is valued at less than £325,000, your Executors will need to use Form IHT205.
Form IHT205 is used when there is no inheritance tax to pay, and is a much shorter and simpler form that the full inheritance account (Form IHT400).
Inheritance tax reference number
If there is any inheritance to pay in respect of your estate, your Executors will need to obtain an inheritance tax reference number and payslip from HMRC. This can be applied for by completing Form IHT422 and sending it to HMRC together with Form IHT400. It is also possible to apply for an inheritance tax reference number online.
How does your Domicile affect the Inheritance Tax position?
Whether inheritance tax is due on your death or on certain lifetime gifts you make, depends on what is known as your ‘domicile status’.
If you are domiciled in the UK, your worldwide estate is subject to inheritance tax.
If you are not domiciled in the UK, only your UK estate is subject to inheritance tax.
The concept of domicile is quite complicated and it is not simply based on where you live or the country of which you are a national or citizen. Instead, it is the jurisdiction with which you are most closely connected and where you intend to reside indefinitely. For many people this is not clear cut and there can be confusion over their domicile status.
Can you change your domicile?
You will have acquired a domicile at birth. If your parents were married when you were born, this would have been your father’s domicile at the time. If they were not married, you would have acquired your mother’s domicile.
It is possible to change your domicile during your lifetime by:
Dependency – if your father, or where appropriate, your mother, changed their domicile while you were under 16.
Choice – by establishing your main residence in another country with the intention of living there indefinitely and cutting ties with the old country. This can be a difficult thing to prove.
If you think that you may be domiciled somewhere other than the UK, it is advisable to take specialist advice as the question of domicile is far from clear cut.
If you are not domiciled in the UK but have lived here for many years, are you liable to pay inheritance tax?
The answer is yes, depending on how long you have been in the UK. If you have lived in the UK for 15 out of the last 20 years, then you will be known as being ‘deemed domiciled’ in the UK for inheritance tax purposes. This means that even if you are actually domiciled in another country, you will be liable to pay inheritance tax in the UK on your worldwide assets. There is also a category of resident known as a formerly domiciled resident, being a person who has previously had UK domicile, subsequently obtained a different domicile but is now resident in the UK. If this applies to you it may have an effect on liability to inheritance tax and you should take specialist advice.