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HMRC INHERITANCE TAX

Tax charged on the possessions, wealth or property of a person who has passed away is referred to as Inheritance Tax. The UK Government assesses the worth of assets, after subtracting the debits from the estate value to reach at the final inherited wealth. Assets of an individual may include – real estate, cash at the bank, vehicles, life insurance policy, other investments, and net-worth of business owned by the person who passed away. No inheritance tax is payable if the estate value is under £325,000 or a person leaves his entire wealth for spouse / civil partner or a trust or charity.

For better computation and savings, if a person is married / in a civil partnership, and the estate value is less than £325,000, any idle threshold can be transferred to the partner. This can increase their collective threshold to £650,000.

Inheritance tax and HMRC

  • The executor or person accountable for the estate pays inheritance tax to HMRC from the estate’s funds
  • The beneficiaries or person inheriting the property usually don’t pay tax (there are some exceptions)
  • Gifts received from a person who has passed away may be eligible for Inheritance Tax (however, some conditions apply)

HMRC INHERITANCE TAX FORMS

While applying for a grant, individuals can send the inheritance tax forms. This is legitimately acceptable and forms used by an individual depend on whether inheritance tax is liable or not. An individual may be able to use the forms to:

  • increase the threshold – moving wealth to a spouse or civil partner’s threshold
  • reduce the estate value by taking away anything on which Inheritance Tax is not paid

For no payable Inheritance Tax; fill form IHT205. It is permitted to fill this form if the complete inheritance tax threshold passes to:

  • spouse or civil partner of the person who passed away
  • a trust or charity, with a charity reference number received from HMRC

In case a person staying abroad died; instead to form IHT205 fill form IHT207, if the person who died:

  • permanently stayed abroad, and
  • in cash or bank account balance had less than £150,000 in UK assets

Deduct things on which tax is not paid: Form IHT400 can be used to deduct everything on which Inheritance Tax was not paid. This comprises details of things that are exempt from Inheritance Tax because:

  • it qualifies as a heritage asset – form IHT420
  • it qualifies for agricultural relief – form IHT414
  • it is a gift on which inheritance tax is not paid
  • it is passed to a civil partner or spouse
  • it qualifies for business relief

HMRC INHERITANCE TAX TRANSFERABLE NIL RATE BAND

For the tax year 2016-17, each individual can leave behind an estate valued upto £325,000. Beneficiaries will only have to pay tax if the value is about this threshold. This amount has been determined by the UK government and is referred to as the nil-rate band. Legally, the £325,000 limit has been ceased until 2020-21, even though the extra main residence allowance will be brought in 2017 onwards. Let’s assume an individual leaves behind a net asset worth of £600,000.

Particulars

Amount

Net asset worth

£600,000.00

Threshold limit

£325,000.00

Taxable Amount

£275,000.00

Tax @40%

£110,000.00

According to the above example, the net payable tax amount will be £110,000.00. The calculation might change if a minimum of 10% of the assets are left for charity.

Particulars

Amount

Net asset worth

£600,000.00

Threshold limit

£325,000.00

Taxable Amount

£275,000.00

Tax @36%

£99,000.00

When a person dies, any assets left behind for the spouse (provided the spouse is a UK-domicile) are exempt from inheritance tax. In addition to this, as stated earlier the partner’s inheritance tax allowance increases when clubbed, meaning a couple can together leave £650,000 tax-free. Let’s assume that Mrs. and Mr. Croft have a net worth of £800,000. If Mr. Croft passes away and leaves £200,000 for the children, the remaining £125,000, which form a part of the nil-rate allowance, will get transferred to Mrs. Croft, thereby increasing her total allowance to £450,000. Alongside, if Mrs. Croft expires and her net worth is £600,000 and the children did not use the entire nil-rate allowance, they will owe 40% on the amount above £450,000.

Exemptions from inheritance tax: Individuals occupied in hazardous activities are let off from giving inheritance tax. Such people might included – police officers, firefighters, armed forces, and paramedics. The exemption might even come into play if an individual got injured during active service.

SPRING BUDGET 2017 AND HMRC INHERITANCE TAX

As proclaimed in the Summer Budget 2015, from April 2017 non-UK domiciled individuals will be considered residents in the UK for tax purposes. In addition, people born in the UK with a UK domicile of origin, but have taken up a domicile of choice somewhere else, will be considered UK residents for all tax purposes. Non-domiciles who set up or intend to set up a non-UK resident trust previous to becoming deemed residents in the UK will not be taxed on any income. As previously announced and following further consultation in December 2016 on charging Inheritance Tax on UK inhabited property, the limit has been increased from 1% to 5% of an individual’s total property interests.

As announced at Budget 2016, non-residents will be able to separate out amounts of income, and capital within their out of the country funds to provide certainty on how amounts sent to the UK will be taxed. Post consultation on the draft legislation it will be extended to income, capita, and gains held in funds from years before 2007 to 2008, as well as those from subsequent years. Those who become deemed domicile in April 2017, excepting those who were born in the UK with a UK domicile of origin, will be able to treat the cost base of their non-UK based assets as the market value of that asset on 5 April 2017. The government will legislate the above mentioned reforms in Finance Bill 2017 to be effective from 6 April 2017.

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