Understanding the Complexity Of Inheritance Tax Advice or IHT

This blog has been written for people who need to understand the complexities of inheritance tax advice, and it answers some of the common questions about IHT that clients often ask.

How much do you inherit without paying tax?

The IHT that has to be paid on an inheritance depends on the value of the estate (the house, shares, cash and personal property) of the person who has died. The tax also depends on the type of assets in the estate because some types of assets, such as a working farm, can be exempt from IHT.

Normally, no Inheritance Tax has to be paid if the estate’s value is below the £325,000 threshold or everything above the £325,000 threshold is left to the deceased’s spouse, civil partner, a charity or a community amateur sports club.

If the deceased gives their home to their children (including adopted, foster or stepchildren) or grandchildren, the threshold can increase to £500,000.

Can I gift a classic car IHT-free?

Classic cars are generally not exempt from IHT even though cars are exempt from Capital Gains Tax. However, some rare classic cars might be exempt from inheritance tax if they are considered by HMRC to be of sufficient scientific, historic or artistic interest.

What is the 7-year rule?

At the moment, valuable gifts made during the life of the donor are potentially exempt from IHT (unless they already benefit from a specific exemption). However, gifts made less than 7 years before the donor’s death may be taxed depending on to whom the donor made the gift and their relationship with the donor, the value of the gift and when the gift was made.

Who is legally responsible for paying inheritance tax?

The money in the deceased’s estate is used to pay the Inheritance Tax to HMRC, and if the money is insufficient, assets will need to be sold to raise the cash, or money may need to be borrowed. This is done by the person dealing with the estate, who will be a personal representative or, if there was a will, the executor. The people who inherit do not normally have to pay the IHT themselves but receive what’s left after the IHT is paid.

Anyone who received gifts from the deceased while they were alive might have to pay Inheritance Tax, but only if the deceased gave away more than £325,000 and died within 7 years of making the gift.

Can you put your house in child’s name to avoid inheritance tax?

You can gift your house to your children in order to remove that assets from your estate so that it will not attract IHT. However, there are three important things to take into account before you do this. First, unless you have alternative accommodation, you will make yourself homeless, and your children may sell the house against your wishes. Second, if you reserve a benefit out of the asset such as the right to live to continue living there on favourable terms, the house will still be treated as yours for IHT purposes. Third, if you die within seven years the gift may still attract IHT.

Can inheritance tax be avoided through trusts?

Putting an asset into a trust may mean that it no longer counts as yours for IHT. However, there is a specific set of rules for IHT on trusts and Inheritance Tax can be payable:

• When assets are transferred into a trust
• When a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
• When assets are transferred out of a trust (known as ‘exit charges’) or the trust ends
• When someone dies and there is a trust.

If you are considering using a trust to avoid IHT it will be important to take Inheritance Tax advice from an Inheritance tax advisor.

What are the deadlines for reporting and paying inheritance tax?

You must report the value of the estate to HMRC using form IHT400 within 12 months of the death. You must pay the Inheritance Tax by the end of the sixth month after the person dies. For example, if the person dies in December, the inheritance tax has to be paid by 30 June. There are different due dates if a trust is involved. If in any doubt you should consult an inheritance tax liability advisor.

How does inheritance tax work for overseas assets?

If the deceased person was domiciled in the UK, that person’s worldwide assets would be within the scope of IHT. If the deceased was domiciled outside the UK, Inheritance Tax is only paid on their UK assets, and IHT is not paid on their ‘excluded assets’ such:

• Foreign currency accounts with a bank or the Post Office
• Overseas pensions
• Holdings in authorised unit trusts and open-ended investment companies

What happens if inheritance tax is not paid on time?

HMRC will charge interest on late payments of IHT.

Conclusion

The answers above should be treated as a high-level introduction to the various IHT topics mentioned, and you should always take detailed IHT advice from an inheritance tax advisor before deciding to act or refrain from acting in any particular situation involving Inheritance Tax. This is especially important given that the Labour Government, which came to power in July 2024, may make various changes to IHT in order to raise more tax.

Contact Patrick Cannon to find out more about IHT, when you or your estate might have to pay it and what any IHT changes announced by the Government may mean for you and your family.