This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website:
Introduction – Is Inheritance Tax due?
Calculating Inheritance Tax
Valuing assets
Responsibilities of personal representatives
Business relief and businesses
Discretionary trusts
Deceased left no will
Pensions
Agricultural relief
Deceased's liabilities
Foreign aspects
Joint property
Penalties
Settled property
Woodlands
Probate
Alter Inheritance tax
Gifts
Excepted estates
Paying IHT
Thresholds and Interest
Introduction
This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
It also gives advice about lifetime gifts and the taxation of discretionary trusts.
The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
- gifts into certain kinds of trusts
- the tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits
- the ending of an interest in possession during a beneficiary's lifetime
- the treatment of funds in alternatively secured pensions on death.
This article will be updated as necessary when the Finance Bill is enacted.
How do I work out whether there is any inheritance tax due on an estate?
Follow the guidance in article 1 – An introduction to find out how to calculate the inheritance tax on an estate.
How do I divide the tax between the instalment option property (IOP) and non-instalment option property (NIOP)?
You will need to calculate the total tax due and then apportion the tax between the NIOP and the IOP.
Example
The deceased died on 3 March 2005.
Non-instalment option property (bank account, chattels shares etc)
£101,050
less liabilities (gas bill) £50
less funeral expenses £1,000
net non-instalment option property £100,000
Instalment option property (house) £300,000
aggregate chargeable transfer £400,000
less IHT threshold £263,000
total liable to inheritance tax £137,000
£137,000 @40% = £54,800 total IHT due
You can now calculate the portion of tax which is due on the NIOP:
- NIOP / Aggregate chargeable transfer x total IHT due = tax due on the NIOP
- 100,000 / 400,00 x £54,800 = £13,700 non-instalment option property tax
Similarly, the tax due on the IOP is calculated:
- 300,000 / 400,000 x £54,800 = £41,100
(Check that the tax on the NIOP + the tax on the IOP = the total tax due £13,700 + £41,100 = £54,800)
Each instalment is 1/10 of the total tax due on the IOP, so the first instalment will be:
- £41,100 / 10 = £4,110
More on instalments
The deceased had an interest in a trust, how do I work out who pays what tax?
If the deceased had a life interest in a trust as well as a personal estate, the tax due on the trust property is paid by the trustees of the trust and the tax due on the personal estate is paid by the personal representatives.
This means that the tax has to be apportioned between the personal estate and the trust.
Example
Mr Lloyd died on 9 April 2005. As well as his personal estate he had a life interest in a trust set up under his late wife's will.
Deceased's net estate £254,678
Mrs J Lloyd Will Trust net value £123,450
Aggregate chargeable transfer £378,128
less IHT threshold £275,000
total liable to inheritance tax £103,128
£103,128 @ 40% = £41,251.20 total IHT due
You can now calculate the portion of tax which is payable by the executors and the portion which is payable by the trustees of the Mrs J Lloyd Will Trust.
- deceased's net estate / aggregate chargeable transfer x total IHT due = tax payable by the executors:
£254,678 / £378,128 x 41,251.20 = £27,783.64
- net value of Mrs J Lloyd Will Trust / aggregate chargeable transfer x total IHT due = tax payable by trustees
£123,450 / £378,128 x £41,251.20 = £13,467.56/
Both the deceased's estate and the will trust could consist of non-instalment option property (NIOP) and instalment option property (IOP) and the total tax due would be apportioned in four ways.
Example
The facts are as in example 2 above, but the deceased's net estate is divided into NIOP and IOP and the Mrs J Lloyd Will Trust also contains both NIOP and IOP.
Deceased's net estate IOP £240,000
Deceased's net estate NIOP £14,678
Mrs J Lloyd Will Trust IOP £120,000
Mrs J Lloyd Will Trust NIOP £3,450
Aggregate chargeable transfer £378,128
less IHT threshold £275,000
total liable to inheritance tax £103,128
£103,128 @ 40% = £41,251.20 total IHT due
You can now calculate the portion of tax which is payable by the executors on both the IOP and the NIOP, and the portion which is payable by the trustees of the Mrs J Lloyd Will Trust on the IOP and the NIOP using the same method of apportionment as in the previous two examples.
- deceased's net estate IOP / aggregate chargeable transfer x total IHT due = IOP tax payable by the executors
£240,000 / £378,128 x £41,251.20 = £26,182.37
1st instalment = £2,618.23
- deceased's net estate NIOP / aggregate chargeable transfer x total IHT due = NIOP tax payable by the executors
£14,678 / £378,128 x £41,251.20 = £1,601.27
- Mrs J Lloyd Will Trust IOP / aggregate chargeable transfer x total IHT due = IOP tax payable by the trustees
£120,000 / £378,128 x £41,251.20 = £13,091.18
1st instalment = £1,309.19
- Mrs J Lloyd Will Trust NIOP / aggregate chargeable transfer x total IHT due = NIOP tax payable by the trustees
£3,450 / £378,128 x £41,251.20 = £376.38
How do I calculate the IHT when there have been lifetime gifts?
You should follow the guidance in article 18 – gifts to find out how to calculate the tax payable when there have been gifts.
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