September 1st 2015

After someone dies, the people looking after their affairs have to add up the value of what is left behind and take off any debts and expenses. Depending on how much is left in the person’s estate (their property, money and possessions) there might be Inheritance Tax to pay.

Inheritance Tax is paid if a person’s estate is worth more than £325,000 when they die. This is called the ‘Inheritance Tax threshold’. For people who are married, in a civil partnership or widowed, the threshold for Inheritance Tax is currently £650,000 between them. For single people, the Inheritance Tax threshold is currently £325,000.

But from 2017, a £175,000 allowance (which can only be used on property) will be phased in that means you can leave your home to children and grandchildren tax free when you die. This is per person and can be transferred to your partner when you die. This means that when added to the existing £325,000 individual allowance, a couple will be able to leave a million pounds without paying inheritance tax by 2020.

Payment of Inheritance Tax
Various rules exist for determining the time for payment of Inheritance Tax (IHT). In certain circumstances it will be possible to pay in instalments, it is even possible to settle a liability by transferring ownership of assets to the Crown (for example, a valuable painting may be donated to a national museum in lieu of an inheritance tax bill).

Unless it can be paid in instalments, IHT is generally due for payment as follows:

  • Chargeable lifetime transfers: Tax is due six months after the end of the month of the transfer. But if the transfer is made between 6 April and 1 October in any year, the tax is due at the end of April the following year.
  • Estates: The personal representatives must pay the tax at the time that the IHT account is sent to HMRC, and this depends on the length of time it takes to sort out the estate.
  • PETs: Tax due on a potentially exempt transfer (PET) that becomes chargeable because of the transferor’s death within seven years needs to be paid six months after the end of the month in which the death occurs.

IHT will be paid by the estate before the balance is then paid across to the beneficiaries. This means that the beneficiaries have to find the money to pay the tax elsewhere. The most obvious way to solve this problem is to take out a loan to pay the tax owed. The loan can then be paid off after cash from the estate is received or, in the case of assets, the assets are sold to raise the funds needed.

It may be worth considering a life insurance policy that will pay out on death and so cover any IHT arising on an estate. Remember, though, that HMRC may consider a life insurance policy to form part of an estate, so the plan should be set up under a trust. A fringe benefit of this is that all proceeds of the policy are paid free of tax.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.