IHT – Paying Inheritance tax

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.

Who pays the inheritance tax on the deceased's estate?

As a personal representative, you are liable for inheritance tax on:

·                                 assets that were not held in trust, and

·                                 land in the UK, held in trust which comes into your possession.

You must also tell the trustees of any trust the deceased had an interest in, that they are liable for the inheritance tax on the assets in that trust.

Who else is liable?

If, for some reason, you or the trustees do not or cannot pay the tax, you should tell the following that they have a secondary liability to inheritance tax:

·                                 the beneficiaries, or anyone, who later receives assets in the estate

·                                 anyone benefiting from assets already in trust at the time of death or who receives income from such assets.

Is there any limit on liability?

Yes. Your liability as a personal representative is limited to the assets you receive as a personal representative, or might have received but for your neglect or default.

There is a separate limit to your liability for the inheritance tax on settled land in the UK. This cannot exceed the value of the land that comes into your possession. Similar provisions apply regarding neglect or default.

There are also limits to the liability for inheritance tax of:

·                                 trustees - liability is limited to the assets they have received, accounted for or had available to them as trustees, or would have but for their neglect or default

·                                 any person who possesses, or has a beneficial interest in, any assets - their liability is only to the extent of those assets

·                                 people receiving benefits under a discretionary trust - liability is only to the extent of amounts they received, less any income tax that they have paid

Who pays the tax if inheritance tax is due on gifts?

If a person dies within seven years of making a gift, inheritance tax (or additional inheritance tax) may be payable. If it is payable on such gifts, the people liable are:

·                                 the transferee

·                                 a nominee, a trustee, or a life tenant – any person who takes the asset (or a beneficial interest in possession in it) at any time after the transfer

·                                 a person who receives a benefit from a discretionary trust – where property is transferred into trust, any person for whose benefit any of the asset or its income is used

·                                 You will have a secondary liability for the inheritance tax (unless the charge arises under the settled property rules) if

·                                 it has not been paid within 12 months after the end of the month in which the death occurs, or

·                                 no-one else is liable for the inheritance tax or part of it because of the limitation of liability provisions, for example, if the tax on the value transferred exceeds the value of the asset actually received by the transferee.

When does the inheritance tax have to be paid?

Inheritance tax is due six months after the end of the month in which the death occurred. We call this the due date.

What about the tax on gifts?

Inheritance tax on potentially exempt transfers, which become chargeable because the person who made them dies within seven years of the gift, is also due six months after the end of the month in which death occurred.

What about instalments?

If the estate includes installment option property, the first instalment will also be due on the due date (see table above). The second instalment will be due twelve months after that.

How do I work out how much tax is due?

You need to complete the form IHT200 first. When you have done that, you can work out the tax and interest that is due with the help of the working sheet IHT200(WS).

Will you work out the tax for me if I don’t want to do it myself?

If you are applying for a grant without the help of a solicitor or other agent, you do not have to work out the tax if you do not want to. You can send in the forms to us and we will make a provisional calculation of the tax that is due based on the information on the form.

In that case, you do not have to fill in the form IHT200 (WS) and you should leave sections H and J of form IHT 200 blank. Make sure you remember to fill in sections K and L.

How much tax do I have to pay before I can get the grant of representation?

You must pay the inheritance tax you are liable for on the deceased’s estate before you can get the grant of representation, even if this is before the due date.

You will also have to pay the first installment of tax on any installment option property if you are applying for the grant after the due date.

Will I have to pay any interest?

·                                 When is interest charged?

·                                 What is the rate of interest?

·                                 How do I work out the interest on tax not being paid by installments?

·                                 How do I work out the interest on tax being paid by installments?

·                                 When is interest not payable on installments?

·                                 What happens about the interest if I make a payment on account?

When is interest charged?

Interest is charged on inheritance tax you have not paid by the due date. (See table 1 below)

The reason why you have not paid the tax does not matter. Interest is not a penalty; it compensates the Exchequer for the delay in receiving the money due to it. If you pay too much tax, we pay interest on the overpayment at the same rate as we would charge interest if tax was overdue.

What is the rate of interest?

Since the 6 September 2005, the rate of interest has been 3%. For earlier periods, see table 2 below.

How do I work out the interest on tax not being paid by installments?

1.                               Work out the number of days from the date interest starts (table 1) to the date you expect to pay the tax, including those two days themselves.

2.                               From table 2, find out the interest rate for that period.

3.                               Multiply the tax due by the interest rate then by the number of days and divide the answer by 366

tax due x interest rate % x number of days/366 = interest due

Example

The deceased died on 7 February 2004. The papers and tax were sent to us on 14 November 2004. The tax due was £5,000.

The date interest starts from for a death in February is 1 September the same year. The start date is 1 September 2004 and the finish date is 14 November 2004.

1.                               The number of days between those two dates is 75:

·                                 days in September = 30

·                                 days in October = 31

·                                 days to 14 November = 14

·                                 Total = 75

2.                               The rate of interest for the period 1 September 2004 to 14 November 2004 is 4%

3.                               The interest due is:

£5,000 x 4% x 75/366 = £40.98

How do I work out the interest on tax being paid by installments?

Interest is normally payable on installments from the date when the first installment is due. On the first installment, we charge interest, on that installment only, from the due date to the date of payment.

On each later installment, we charge interest

·                                 on the whole unpaid portion of the tax, for one year, and

·                                 on the installment itself, from the date it is due to the date of payment.

Example 2

The deceased died on 7 February 2004. The papers and tax were sent to us on 14 November 2004. The tax due on the installment option property is £10,000. Each installment is therefore £1000.

The date interest starts from for a death in February is 1 September the same year. The start date is 1 September 2004 and the finish date is 14 November 2004.

Installment 1

£1,000 x 4% x 75/366 = £8.19 interest for late payment

Installment 2

The second installment is due on 1 September 2005 and is paid on 15 September 2005, which is 15 days late. Interest is charged on the late payment:

£1,000 x 4% x 15/366 = £1.63 interest for late payment

plus interest is charged on the whole of the outstanding balance for the whole year from 1 September 2004 to 1 September 2005:

£9,000 x 4% = £360

The total tax and interest due on the second installment is therefore:

·                                 tax - £1,000.00

·                                 interest 1 - £1.63

·                                 interest 2 - £360.00

·                                 Total - £1,361.63

·                                  

When is interest not payable on installments?

Inheritance tax paid by installments on some types of asset is interest free. (We call this 'with interest relief' or WIR.) This means you only pay interest if you pay the installment itself after the date it is due.

Installments of inheritance tax are interest-free (if the installments are paid on time) if the tax is on:

·                                 shares or securities which qualify for payment by installments. But shares in an investment or property company (whether a dealing or holding company) qualify only if the company is:

-           a holding company of companies, which are not investment or property companies, or

-           a market maker or discount house in the UK

·                                 a business or interest in a business carried on for gain

·                                 land which qualifies for agricultural relief, and

·                                 timber.

·                                  

What happens about the interest if I make a payment on account?

You may send money on account at any time, even if you have not received a calculation. This will stop interest running on the amount you have sent. (This amount is shown on calculations as a 'deposit'.) When we send a calculation, it will show the deposit set off against the amount due.

Can I pay by installments?

In some cases you may pay inheritance tax by installments. However, you may have to pay interest on any tax paid this way.

You may pay inheritance tax by installments on certain types of assets. These are:

·                                 land and buildings

·                                 certain shares and securities

·                                 the net value of a business or an interest in a business, including a profession or vocation, carried on for gain (this does not include individual assets of a business, which are distinct from the business as a whole)

·                                 timber

The most common asset on which tax may be paid by installments is the deceased’s house.

In many estates, 100% business relief may cover businesses, business interests and unquoted shares and 100% agricultural relief may cover agricultural property. If this is so, there may be no inheritance tax to pay on them.

What shares or securities qualify for payments by installments?

You may pay inheritance tax by installments on shares or securities in a company if

·                                 they gave the deceased control of the company at the time of the transfer

·                                 they are unquoted and:

-           you can show that the inheritance tax on their value could not be paid in one sum without undue hardship, or

-           at least 20% of the tax for which the same person is liable in the same capacity, is on assets (including the shares in question) which qualify for payment by installments

·                                 they are unquoted shares and their value is more than £20,000 and the shares represent at least 10% of the nominal value of the company’s share capital or (if they are ordinary shares) at least 10% of the nominal value of the ordinary share capital.

What must I do to pay by installments?