In the first of a series of articles aimed at refreshing IFAs' memory on inheritance tax issues, Scottish Widows senior marketing manager (technical support) Anne Young explains when an account of a deceased person's estate will have to be made to the Capital Taxes Office.
If the Inland Revenue didn't get you while you were alive, its last chance is when you die.
Many people call inheritance tax a voluntary tax as there are so many opportunities to give away money and not pay any IHT. But how many of us are prepared to make gifts of our worldly goods during life?
Yet there are lots of ways to reduce the tax payable without giving up too much. Financial advisers need to know the subject thoroughly in order to use the legislation to their clients' best advantage.
This is the first of a series of articles which aim to show how the inheritance tax rules can be used to save your clients tax. They should at least refresh your memory and might even help you revise for your G10 exam.
Let's start with the basics. What is inheritance tax?
Inheritance tax was introduced in the Finance Act 1986 to replace capital transfer tax, which in its turn replaced estate duty. The Act received Royal Assent on July 25, 1986 and applies to all transfers made on or after March 18, 1986.
IHT applies to gifts (transfers of value) which reduce the value of someone's estate. Few lifetime gifts result in an immediate charge unless the donor dies within seven years of making the gift. Once the donor has survived for seven years, a gift falls out of account.
Currently, IHT is payable at a single rate above a threshold which generally increases yearly in line with the retail prices index.
IHT, like capital transfer tax before it, has always treated married couples as separate individuals, giving many opportunities to reduce the tax.
Generally, no account need be made of a lifetime gift which is a potentially exempt transfer. However, if a gift is chargeable, then an account must be made by the donor to the Capital Taxes Office within 12 months of the gift if:
The cumulative total in that year exceeds £10,000, or
The cumulative total in the last 10 years exceeds £40,000.
If the chargeable gift is to a trust, the trustees must make a return of the gift within this timescale.
In the event of a death, the personal representatives must present an account if:
The gross estate totals £210,000 or more, or
The deceased died domiciled outside the UK, or
£50,000 or more of the estate is property which is situated outside the UK, or
Any of the assets of the estate pass under a trust or involve a gift with reservation, or
Total taxable gifts in the seven years before death were cash, quoted shares or securities with a total value of more than £75,000.
The account should be presented to a Probate Registry in England, Wales and Northern Ireland or Commissary Office or Sheriff Court in Scotland. If the account is satisfactory, a grant of representation (confirmation in Scotland) will be given.
Certain other estates will have to make an account but the above covers most cases. You can get the necessary forms from the Probate Registry Office in England, Wales and Northern Ireland or the Capital Taxes Office in Scotland.
Who is assessable to IHT? Individuals domiciled in the UK are assessable on their worldwide assets. However, individuals not domiciled in the UK are assessable only on their UK assets.
But what exactly does domiciled mean? You are normally born with the domicile of your father. The exception is in the case of an illegitimate child or one born after the death of the father. Then, the domicile will be that of the mother. This is known as your domicile of origin.
You do not automatically change your domicile of origin if you go to live in another country. You have to show that you intend to live there permanently.
Even then, you may still be deemed domiciled in the UK for IHT purposes until you have established non-residency and non-UK domicile for three years.
If you lose your domicile of choice for any reason, you revert to your domicile of origin until you establish a new domicile of choice.
Where you are not able to choose your own domicile, then you will have a domicile of dependence, which is that of the person on whom you depend. A person is generally deemed to be able to choose their own domicile after the age of 16. In Scotland, however, a boy can choose his own domicile at age 14 and a girl at age 12.
The table (left) will help identify where clients' assets are situated.
Next week, we will look at who is primarily liable to pay inheritance tax and the various exemptions that are available.