ATXP6 UK
Syllabus A3. Inheritance Tax A3g. IHT administration

A3gii. Payment of inheritance tax and the due date

Syllabus A3gii)

Payment of inheritance tax
and
Advise on the due dates, interest and penalties for inheritance tax purposes.

When does inheritance tax need to be paid?

For Chargeable lifetime transfers:

The donor is primarily responsible for any IHT that has to be paid in respect of a CLT. 

However, a question may state that the donee is to instead pay the IHT. 

Remember that grossing up is only necessary where the donor pays the tax.

The due date is the later of:

  • 30 April following the end of the tax year in which the gift is made.

  • Six months from the end of the month in which the gift is made.

Therefore, if a CLT is made between 6 April and 30 September in a tax year, then any IHT will be due on the following 30 April.

If a CLT is made between 1 October and 5 April in a tax year, then any IHT will be due six months from the end of the month in which the gift is made.

The donee is always responsible for any additional IHT that becomes payable as a result of the death of the donor within seven years of making a CLT.

The due date is six months after the end of the month in which the donor died.

For potentially exempt transfers

The donee is always responsible for any additional IHT that becomes payable as a result of the death of the donor within seven years of making a PET. 

The due date is six months after the end of the month in which the donor died.

For death estate:

The personal representatives of the deceased’s estate are responsible for any IHT that is payable. 

The due date is six months after the end of the month in which death occurred. 

However, the personal representatives are required to pay the IHT when they deliver their account of the estate assets to HM Revenue and Customs, and this may be earlier than the due date.

Where part of the estate is left to a spouse, then this part will be exempt and will not bear any of the IHT liability.

Where a specific gift is left to a beneficiary, then this gift will not normally bear any IHT. The IHT is therefore usually paid out of the non-exempt residue of the estate.

Illustration:

Alfred died on 15 December 2018. He had made the following lifetime gifts:

  • 20 November 2016 – A gift of £420,000 to a trust. Alfred paid the IHT arising from this gift.

  • 8 August 2017 – A gift of £360,000 to his son.

These figures are after deducting available exemptions.

Alfred’s estate at 15 December 2018  was valued at £850,000. Under the terms of his will, he left £250,000 to his wife, a specific legacy of £50,000 to his brother, and the residue of the estate to his children. The residue of the estate did not include a residential property.

The nil rate band for the tax years 2016/17, 2017/18 and 2018/19 is £325,000.

IHT liabilities are as follows:

Lifetime transfers

20 November 2016 £
Net chargeable transfer 420,000
IHT liability
325,000 at nil% 0
95,000 x 20/80 23,750
Gross chargeable transfer 443,750

The due date for the IHT liability of £23,750 payable by Alfred was 31 May 2017.

8 August 2017 £
Potentially exempt transfer 360,000

The PET is initially ignored.

Additional liabilities arising on death

20 November 2016 £
Gross chargeable transfer 443,750
IHT liability
325,000 at nil% 0
118,750 at 40% 47,500
IHT already paid (23,750)
Additional liability 23,750

The due date for the additional IHT liability of £23,750 payable by the trust is 30 June 2019.

8 August 2017 £
Potentially exempt transfer 360,000
IHT liability 360,000 at 40% 144,000

The CLT made on 20 November 2016 has fully utilised the nil rate band.

The due date for the IHT liability of £144,000 payable by Alfred’s son is 30 June 2019.

Death estate

£
Value of estate 850,000
Spouse exemption (250,000)
Chargeable estate 600,000
IHT liability 600,000 at 40% 240,000

The due date for the IHT liability of £240,000 payable by the personal representatives of Alfred’s estate is 30 June 2019.

Alfred’s wife will inherit £250,000, his brother will inherit £50,000, and the children will inherit the residue of the estate of £310,000 (850,000 – 250,000 – 50,000 – 240,000).

If the death estate is distributed with:

  1. Specific gifts left to specific chargeable persons, and

  2. The remaining (residue) of the estate is left to an exempt person

Then, there is a special way to calculate the inheritance tax payable.

How to calculate the IHT payable?

  1. Step 1:

    (Net chargeable estate – NRB available) * 40/60 = IHT payable

  2. Step 2:

    The gross chargeable estate is then calculated as:

    Net chargeable estate + IHT payable (from above)

  3. Step 3:

    The amount allocated to the exempt residuary legatee will be:

    Total estate – gross chargeable estate (from above)

This is much easier to understand with an illustration!

Illustration

Eddy dies on 06/06/2018 leaving an estate valued at £900,000.

He made no lifetime gifts. 

He left £400,000 in cash to his son and the remainder of his estate to his wife. 

What is the gross chargeable estate value, the IHT payable and the amount of the estate that is left to his wife?

Solution

IHT liability on the estate:

Net chargeable estate £400,000
Less NRB (£325,000)
Taxable amount £75,000

IHT on death £75,000 * 40/60 = £50,000

Gross chargeable estate

£400,000 + £50,000 = £450,000

Remainder of estate left to his wife:

£900,000 - £450,000 = £450,000