Inheritance Tax (IHT) payments to HRMC climb over £5 billion!

The table below shows the total amount of IHT collected each year by HMRC over the last 7 years. The total for 2010/11 was £2.7 billion compared to £5.2 billion in 2017/18. This trend is likely to continue.

(assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/730110/Table.12.1.)

 

How does IHT work?

IHT is typically based on the total value of a deceased person’s estate. When someone dies, the first step is to establish whether the estate is `excepted’ or not. There are three types of `excepted’ estates.

Three types of excepted estate

Low-value estates

A low-value estate is where the total value of the estate is below the nil rate band of £325,000. (2018/19)

Exempt estates

This is where the total value of the estate is below £1,000,000 and there is no IHT due because of a spouse, or civil partner exemption and/or charity exemption.

Foreign domiciliaries

These are the estates where there can be no liability to IHT because the gross value of the estate in the UK does not exceed £150,000

Issues relating to payment of IHT

Many people believe IHT can be paid out of the resources from the estate, however this isn’t necessarily correct. Any IHT must be paid to HMRC before a grant of probate or letters of administration (if died intestate). Sometimes access to the assets of the estate is required in order to pay the IHT through the sale of items or cash accounts to raise the required amount. This gives the personal representative a dilemma. The IHT could be paid without the grant but the grant couldn’t be issued until the IHT has been paid.

One possible situation is that since 1st April 2003 the use of money held in banks and building societies in the deceased name not held jointly can be used to pay HMRC directly to cover the IHT under the direct payment scheme (DPS). Not all banks and building societies have signed up to the DPS, so it is best to check before applying for a grant.

So, the problem that executors often have is how to raise sufficient cash to pay the IHT in order to obtain the grant.

The problem may be avoided for your executor if you have an established a life assurance that’s held under trust. For a couple, the policy would usually be set up as a joint life second death, whole of life policy. There are some points to understand:

The policy must be set up in a trust from the outset.

  1. The policy must be set up under trust from outset.
  2. The policy must be whole of life.
  3. The sum assured should match the IHT liability.
  4. The sum assured should be regularly reviewed to ensure the IHT is fully covered.
  5. A letter of wishes is required stating that the policy is to be used to pay the IHT.
  6. The premiums must be paid by the settlor and may be exempt gift themselves as long as this is deemed to be gifts not of unusual expenditure.

In order to qualify as a gift from normal exemption, the following need to apply:

  • They must be paid from income not capital
  • They must be regular or intended to be regular
  • They must have no detrimental impact upon the settlor’s standard of living.

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