April 2008

ABC of IHT

Nil rate band

This is the value of your estate at death on which IHT is charged at a rate of 0%. The value of your estate includes any assets held in trust and gifts made within seven years of death. Where this value is greater than the NRB (£300,000 for 2007-08), then tax will be due on the excess at a rate of 40%.

Everyone is entitled to a nil rate band although, until recently, married couples would lose the use of the NRB of the first of them to die if the deceased's estate passed outright to their spouse.

Thanks to changes made by the Chancellor in his Pre Budget report on 9 October 2007, any previously unused NRB can now be claimed by the estate of the surviving spouse provided he/she dies on or after 9 October 2007.

Offshore assets

The liability of offshore investments and other property to UK IHT is directly related to your domicile status at the time you die. As already mentioned, if you are UK domiciled then all of your overseas assets form part of your estate for IHT purposes. Where you are non UK domiciled, only those assets situated in the UK are subject to IHT, although it may be that your offshore assets will be subject to a form of death taxation in the jurisdiction in which they are located.

Probate

Following your death, your executors will apply to the Court for a Grant of Probate. The grant is a legal document which confirms that your executor has the authority to deal with your estate (property, money and possessions). They can use it to show they have the right to access funds, sort out finances and collect in and share out the assets in accordance with your will.

Generally, an executor must apply for a grant of probate before he is able to administer and distribute a person's estate. However, if the value of your estate is less than £5,000 or all of the assets contained in your estate are jointly held and therefore pass by survivorship, it may not be necessary to apply for a grant.

Quick succession relief

This relief acts to reduce the level of IHT due on death if you die within five years of being the recipient of either an inheritance or a chargeable gift which itself has suffered IHT.

Registered civil partnerships (RCP)

Following the introduction of the Civil Partnership Act in 2004, if you are in a same sex relationship you will both now have the same legal rights and IHT exemptions as a married couple, provided you have registered your partnership in accordance with the provisions of the Act.

Spouse exemption

On your death, your estate can pass to your surviving spouse or RCP, exempt from IHT, thanks to the spouse exemption, provided you are both either UK domiciled or non UK domiciled. Gifts made between you during your lifetimes are also exempt.

However, this exemption is limited to £55,000 if the first to die (or the donor) is UK domiciled but the surviving spouse or RCP is not domiciled at the time of death or transfer. In addition, the £55,000 is a cumulative lifetime exemption which can therefore be used up by gifts made during lifetime.

Trusts

In general terms, a trust is an obligation which ensures that the person(s) holding the legal title to an asset (i.e. the trustee) deals with the asset for the benefit of another person known as the beneficiary. It is possible to create a trust during your lifetime as well as on your death. There can be distinct tax advantages to doing this in addition to enabling you to provide for future generations of your family, long after you have passed away.

Unilateral relief

Where an overseas asset of your estate is liable to IHT in the UK, as well as a similar form of tax in the country where the asset is situated but there is currently no double taxation agreement between the two jurisdictions. Relief for the UK IHT paid may still be available under the unilateral relief provisions contained in the IHT Act 1984.

Variations

If you die without leaving a valid will in place you are deemed to have died intestate. In most cases, the court will issue a grant of letters of administration and appoint an administrator to distribute the estate.

There are complex provisions laid down in the law to decide who will take benefit, with spouse/registered civil partners and minor dependents being given priority. It does not matter what you may have wished for or promised while you were alive. The rules on intestacy do not recognise "common law" partners, and the term "children" include natural, adopted and illegitimate children, but not stepchildren.

Wills

A will sets out who is to benefit from your property and possessions after you have died. You are able to dictate who gets what and to what extent. If you are co-habiting with someone it is also a way to ensure that your partner is provided for after your death.

In England, when you sign and date your will you should do so in front of two or more witnesses (Scottish wills only require one witness) who then sign and date the same document in your presence.

If the will is not dated, or witnessed it's not valid and the rules of intestacy might therefore apply, unless an earlier, valid will can be found.

Yachts

A yacht or ship on the high seas is still considered an asset of your estate when you die. If you are UK domiciled then the yacht's whereabouts makes very little difference. If however, you are not UK domiciled then unless the yacht is moored in a UK port, it may well fall outside of the scope of IHT in the UK. The situs of a movable asset such as a yacht is determined by its port of registry. However, when it comes within UK territorial waters this is displaced by a UK situs.

- For the rest of this article see www.retirement-planner.co.uk/703434.

Richard Warner
Tax and Estate Planning Manager
Legal & General