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Who pays Inheritance Tax?

Inheritance Tax (IHT) is levied on a person’s estate when they die and can also be payable during a person’s lifetime on certain trusts and gifts. The rate of Inheritance Tax payable is 40% on death and 20% on lifetime gifts.  IHT is payable at a reduced rate on some assets if an individual leaves 10% or more of the 'net value' to charity of their estate.

There is a nil-rate band, currently £325,000 below which no Inheritance Tax is payable. In addition, there is an IHT residence nil-rate band (RNRB) which relates to a main residence passed down to a direct descendent such as children or grandchildren. The RNRB of £175,000 (where available) is additional to the £325,000 Inheritance Tax nil-rate band.

Funds from the deceased estate are usually used to pay IHT. If there is a will, it is usually the executor who deals with paying any IHT due to HMRC. IHT can be paid from funds within the estate, or from money raised from the sale of the assets. Payment of any IHT due is often made using the Direct Payment Scheme (DPS) whereby some or all of the IHT is paid from the deceased person’s accounts directly to HMRC. The deceased may also have used a life insurance policy to fund the payment of some / all the IHT due.

Once the IHT and any outstanding debts are paid, the executor or administrator can distribute what remains of the estate. The beneficiaries of the will do not normally need to pay IHT on their inheritance, but there are exceptions.

Source: HM Revenue & Customs Wed, 22 Jul 2020 05:00:00 +0100

Trusts and CGT

A trust is an obligation that binds a trustee, an individual or a company to deal with the assets such as land, money and shares which form part of the trust. The person who places assets into a trust is known as a settlor and the trust benefits one or more beneficiaries.

The trustees make decisions about how the assets in the trust are to be managed, transferred or held back for the future use of the beneficiaries. They are also responsible for reporting and paying tax on behalf of the trust. A trust needs to be registered with HMRC if it pays or owes tax. CGT may be payable when assets are placed into or taken out of a trust.

If assets are transferred into a trust, then tax is paid by either the person selling the asset to the trust or the person transferring the asset (the 'settlor').

If assets are taken out of a trust, the trustees usually have to pay the tax if they sell or transfer assets on behalf of the beneficiary. However, the rules are complex and there are different types of trusts that need to be considered, such as bare trusts or non-UK resident trusts.

Most trusts have an annual exemption from CGT, currently £6,150 (2020-21). There is a higher limit of £12,300 if the beneficiary is vulnerable, a disabled person or a child whose parent has died.

Source: HM Revenue & Customs Wed, 01 Jul 2020 05:00:00 +0100

IHT exemption for gifts out of income

It is possible for wealthier taxpayers to take advantage of the IHT exemption for gifts and payments that are paid as normal expenditure out of income. This is a very flexible exemption from IHT as there are no specific requirements, for example, making fixed, regular gifts to the same person. With proper planning this can be a particularly useful tool and could include helping grandparents pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money to maintain their normal standard of living. A gift must meet all of the conditions to qualify for the exemption and must not fall within any of the exceptions.

This relief is separate to the annual Inheritance Tax exemption of £3,000 for gifts. This exemption can also be carried forward to the following tax year if not used, to make a maximum gift of £6,000. Individuals can also give as many gifts of up to £250 per person as they want during the tax year but only if they have not used another exemption with the same person. There are also special allowances for gifts made at a wedding or civil ceremony.

Source: HM Revenue & Customs Wed, 01 Jul 2020 05:00:00 +0100

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