How To Calculate the Inheritance Tax Due on An Estate
Who Pays Inheritance Tax (IHT)
When I meet clients and we start to discuss what they’d like to achieve in making their Will or through general estate planning, one of the questions constantly asked is Jules, but how do I calculate IHT? Thus, this guide aims to explain what IHT is, how to work out what you need to pay and when. Therefore, you can be on the ball before we meet!
The first thing to note is that we are all liable, but not many estates get caught in the IHT net; actually, just less than 5%. So, the vast majority of us can breath a sigh of relief. However, the caution is that the figure has risen from just 2.5% at the start of the last decade. It must therefore be taken into consideration when making or reviewing one’s Will.
There is normally no tax to be paid if:
the value of your estate is below the Nil Rate Band (NRB), £325,000 at the time of writing and fixed at that level until 2021;
you leave everything above the threshold to your spouse or civil partner;
you leave everything above the threshold to an exempt beneficiary such as a charity
If the value of your estate is above the NRB, the part of your estate above the threshold might be liable for tax at the rate of 40%. So, using a very basic example:
if your estate is worth £600,000 and you have the full IHT threshold available to use;
the tax charged will be on £275,000 (£600,000 - £325,000);
the tax due would thus be £100,000 (40% of £275,000)
Your available NRB might be increased if you’re a surviving spouse or civil partner. That is because couples can transfer unused NRB to the survivor when the first person dies. This can mean one’s NRB can possibly double up to £650.000. This transferable element is known as the Transferable Nil Rate Band (TNRB).
Working Out the Value of the Estate
To work out the value of your estate, you’ll need to follow the steps below. Don’t worry too much about being surgically accurate and stressing. A rough guestimate should suffice to get us in the ball park:
Make a list of all you have in your estate. The headings here will include property, land, cash and investments, jewellery, artwork, antiques and collectables, income (from a trust fund for example, not your job), business and agricultural interests and of course, the all important catch-all that is stuff (representing the small ticket items in your house, shed etc). You must also separately list all your foreign owned assets;
Work out the market value of the assets in the estate: If this proves very difficult, at least try to recall the purchase value. Add the values of each asset to get the gross value for each heading and thus the entirety of the estate;
Take off any debts: What counts as a debt? This will include any money you as an individual or your estate owes. Your mortgage (including equity release), credit card balances, loans etc. Once deducted, this will reveal the net value of your estate.
Apply any reliefs that apply: this is particularly pertinent to agricultural and businesses assets;
Take off the value of any exempt assets: this covers those left to spouses (not partners or cohabiters), civil partners and charities: This gives you the taxable value of the estate;
Work out the available IHT threshold: Take the basic threshold of £325,000 and deduct the value of any gifts made within 7 years of the death from it (taking into account annual exemptions). If the value of the gifts is more than the basic threshold, there’ll be IHT to pay on those gifts. Add any residence nil rate band (RNRB), including anything transferred from a late spouse or civil partner, to get to the available threshold.
Chargeable estate minus available threshold: compare the value of the estate at the end of step 5 (the value of the estate that you’ll pay tax on known as the ‘chargeable estate’) with the available threshold at the end of step 6. If the value of the estate is less than the available threshold, there’s no IHT to pay. If it’s more, you pay IHT on the excess.
HMRC Forms to Complete
IHT400: personal representatives must submit a full and detailed account of an estate to HMRC on form IHT400 if IHT is due;
IHT205; can be used where if no IHT is owed. This will be because the estate is of a low value or an excepted estate. An excepted estate is one on which no IHT is payable because of the spousal/charitable exemptions.
In dealing with IHT forms, the personal representative may well find it advisable to seek professional help from firms such as TWB.
CONTACT TWB
It is always important to review your circumstances as family life evolves and when cultural, political and tax legislation changes occur. Keep up to date with developments and seek expert advice from firms like TWB, but know that TWB is at the forefront of its profession.
Estate Planning is an integral part of our service. As well as minimising the effects of IHT, many families wish to ensure the preservation of their wealth through several generations by making provision for children, whilst also considering events such as divorce, bankruptcy and accounting for later-life care. We have written thousands of Wills and helped countless clients with IHT planning, Lasting Powers of Attorney (LPA) and much more.
Contact Jules Jack for more information: julesj@twb.org.uk - 020 8920 3360