Inheritance Law in
United Kingdom People, be they resident or non-resident, domiciled or non-domiciled who own property in the UK have long been accustomed to the payment of or liability for tax on assets following death. The current regime for taxing the passing of wealth on death is set out in the Inheritance Tax Act 1984, which Act is regularly updated both for the purpose of increasing allowances and for closing off loopholes and tax-avoidance schemes. In 2006 there were some 34,000 estates subject to Inheritance Tax in the UK This is a small percentage of the estates throughout the country. However, due to higher property values in the southeast of England, the majority of chargeable estates derive from this area. The tax yield from Inheritance Tax is quite modest at around 1.5-2% of the total sum raised in direct taxes. As a consequence of this, many argue that Inheritance Tax should be abolished as the tax yield does not justify the cost of collection and administration involved in maintaining the tax. Inheritance Tax is chargeable on both on death and in certain circumstances on lifetime gifts. In our memorandum below we concentrate on the change arising on death and set out a brief synopsis of the current regime.
Basis of Charge Inheritance Tax ("IHT") is payable on all estates (comprising assets owned at death and where relevant assets gifted during the lifetime of the deceased), the value of which exceed the threshold for the tax year of the date of death. The IHT threshold for the current year to 5th April 2009 is £312,000 (up from £300,000 in the fiscal year to 5.4.2008). In relation to persons who are domiciled or deemed domiciled in the UK, IHT is charged on all worldwide assets with a value above the relevant annual threshold. Unless persons have a specific exemption or agreement with the HM Revenue and Customs ("HMRC"), anyone who has been resident in the UK for 17 out of the previous 20 income tax years is deemed domiciled in the UK and is accordingly liable to the full extent of the IHT regime on their worldwide assets. Credit is of course given for any similar and corresponding taxes to which foreign assets may be subject where appropriate double taxation treaties are in place. Mere residence in the UK does not expose someone to liability to IHT but rather must consider the domicile of the client and the location of the assets.
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Example 1 A dies domiciled in Spain with a worldwide assets of £5,000,000 of which:(i) UK assets were worth £300,000. No IHT is payable (ii) UK assets were worth £1,000,000. IHT would be £275,200 (£1,000,000 £312,000 x 40%)
Liability to Account Inheritance Tax is a self-declaratory tax. Accordingly, it is the responsibility of the executor/personal representative ("PR") to file the tax return. The information set out in the return must be correct, accurate and comprehensive. Accordingly, the PR must make appropriate enquiries to ensure that he has full details of the assets and wealth of the deceased and must ensure that open market valuations of assets are taken up. Fines and penalties can be imposed for failing to make a return or making an incorrect or incomplete return. Interest begins to accrue on unpaid tax 6 months after the end of the month of death, so PRs should seek to complete their investigations and file their IHT return within this 6 month period. Correspondingly, the donees of lifetime gifts which have become chargeable because the donor has died within 7 years
of making the gift, also have a duty to file an IHT return and similar provisions regarding penalties, fines and interest apply. Example 2 A, a single person, domiciled in the UK leaves the following assets: House Bank Account Shares Total
£500,000.00 £ 25,000.00 £150,000.00 £675,000.00
No lifetime gifts are known. Hence the IHT is: Estate Less IHT Allowance
£675,000.00 £312,000.00 £363,000.00
Tax @ 40% = £145,200.00 Net Estate = £529,800 (£675,000 - £145,200) is available for distribution. Consider the following alternatives: (i) After some years a lifetime gift by A of £300,000., which had been made six years before his death and was poten-
tially exempt when made, is discovered. Although no inheritance tax was chargeable on that gift the personal representatives are accountable for extra inheritance tax on the death estate of £120,000; or, (ii) A gift of £1,000,000 made one year before AB's death is discovered. In this case not only are the personal representatives accountable for extra inheritance tax of £ as above, but in addition if the donee fails to pay inheritance tax on the £1,000,000 gift, the personal representatives are liable to pay that inheritance tax (limited to the net assets in the estate which have passed through their hands).
Liability for IHT Usually the PR is primarily liable for the payment of IHT. Accordingly, it is imperative that the PR ensures prior to releasing any assets to beneficiaries that all of the IHT payable on the estate has been discharged or appropriate arrangements made with HMRC concerning the discharge of the tax so as to remove any liability for outstanding tax on the PR.. The liability to discharge the tax is personal to the PR and hence the need for care. Special arrangements may be required in relation to :
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(i) Land/Houses/Flats. IHT chargeable on this type of property is payable immediately (if funds are available) or by instalments over 10 years. As the PR will wish to wind up the administration of the estate long before the 10 year period has expired, arrangements should be made with HMRC to ensure that any future claims to outstanding instalment tax will be levied against the beneficiary of the relevant asset, rather than the executors; (ii) In the case of jointly-owned property, the ownership of which passes by operation of law directly to the surviving co-owner, the PR has a secondary liability for the tax if the principal beneficiary does not pay it.
Anyone who has been resident in the UK for 17 out of the previous 20 income tax years is deemed domiciled in the UK