Until relatively recently, Inheritance Tax was seen as a tax on the rich, falling on large estates or families with substantial inherited wealth.
Now, many working people in 'average' homes are falling into the net. This is largely due to the exponential rise in property prices - especially in the south and south east. With the average cost of a home in London at more than £360,000 (at October 2007), taking its owners well over the £300,000 limit, it is easy to see why so many people have now become liable.
How much is it and who pays it?
Inheritance Tax is paid if the taxable value of a deceased person's estate (including their share of any jointly owned assets and those held in some types of trusts) when they die is over £300,000 (2007-2008 tax year). The rate at which the tax is charged is currently 40 per cent. If the estate is worth less than £300,000, Inheritance Tax is not due.
However, there are exceptions. For example, if the estate is left to a husband, wife or civil partner, there is no Inheritance Tax to pay, even if it is above £300,000. New rules announced in October 2007, allow the remaining spouse to use the deceased's allowance to round the threshold to £600,000. For example, if a husband dies, leaving his estate to his wife, there is no tax to pay. When the widow dies, she can leave an estate of £600,000, free of Inheritance Tax, to her beneficiaries.
Most gifts made more than seven years prior to death are exempt for Inheritance Tax. Certain other gifts, such as wedding presents and those given in celebration of a civil partnership up to £5,000, gifts to charity and cash sums of £3,000 given away each year, are also exempt.
Transfers to trusts and companies
Transfers of assets into most trusts and companies can still be subject to Inheritance Tax. As these can be complicated, we recommend that advice is sought from a reputable professional.
Valuing the estate
Valuing the deceased person's estate is one of the first things that an executor should do. They will take the value of all the assets, together with the value of any shared assets, any assets held in trust (from which the deceased had the right to benefit), and certain assets which were given away within the last seven years. From this total will be deducted amounts owed by the deceased, including outstanding mortgages and loans, unpaid bills and funeral expenses. The remaining balance is classed as the 'estate'.
If there are works of art, property or jewellery to be taken into consideration, a professional valuer might be required.
Paperwork and forms
If the estate is excepted, or not liable for Inheritance Tax, executors in England & Wales should complete forms IHT205, plus PA1 to apply for Probate. In Scotland, forms C1 & C5 are applicable.
For estates worth more than £300,000 that are liable for Inheritance Tax, the executor will need to fill out forms IHT200, D18 and PA1 (in England and Wales), and IHT200 and C1 in Scotland.
Who pays out the Inheritance Tax?
The executor (or personal representative) will be responsible for arranging payment of any tax that might be due. Only when any due tax is paid can probate be applied for.
The content provided in the PrimeLocation guides is for information only. In all cases, independent and professional advice should be sought before buying, selling, letting or renting property, or buying financial services products.