IHT - Calculating Inheritance Tax |
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| This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website: |
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| Introduction |
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| 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. |
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| It also gives advice about lifetime gifts and the taxation of discretionary trusts. |
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| The proposals in the Finance Bill 2006 affect the meaning in this article regarding: |
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- 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.
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| This article will be updated as necessary when the Finance Bill is enacted. |
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| How do I work out whether there is any inheritance tax due on an estate? |
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| Follow the guidance in article 1 – An introduction to find out how to calculate the inheritance tax on an estate. |
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| How do I divide the tax between the instalment option property (IOP) and non-instalment option property (NIOP)? |
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| You will need to calculate the total tax due and then apportion the tax between the NIOP and the IOP. |
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| Example |
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| The deceased died on 3 March 2005. |
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| Non-instalment option property (bank account, chattels shares etc) |
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£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 |
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| £137,000 @40% = £54,800 total IHT due |
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| You can now calculate the portion of tax which is due on the NIOP: |
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- 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
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| Similarly, the tax due on the IOP is calculated: |
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- 300,000 / 400,000 x £54,800 = £41,100
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| (Check that the tax on the NIOP + the tax on the IOP = the total tax due £13,700 + £41,100 = £54,800) |
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| Each instalment is 1/10 of the total tax due on the IOP, so the first instalment will be: |
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- £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?
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| 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. |
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| This means that the tax has to be apportioned between the personal estate and the trust. |
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| Example |
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| 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. |
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| 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 |
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| £103,128 @ 40% = £41,251.20 total IHT due |
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| 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. |
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- 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/
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| 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. |
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| Example |
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| 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. |
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| 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 |
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| £103,128 @ 40% = £41,251.20 total IHT due |
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| 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. |
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- 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
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1st instalment = £2,618.23 |
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- 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
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1st instalment = £1,309.19 |
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- 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
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| How do I calculate the IHT when there have been lifetime gifts? |
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| 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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