Inheritance Tax reliefs allow some assets to be passed on free of IHT or with a reduced bill. The executor of a Will or administrator of an estate should claim the reliefs when they’re working out how much the estate is worth.
Business Relief – Business Relief allows a business to be passed on as a going concern by reducing the IHT on it by up to 100%.
Agricultural Relief – Agricultural Relief allows a working farm to be passed on as a going concern without paying IHT on it.
Woodland Relief – You don’t include the value of the timber in a woodland when you’re working out the value of an estate but must include the value of the land. Whoever inherits the woodland may have to pay IHT when they sell the timber – unless it qualifies for Agricultural or Business Relief. If the woodland also qualifies for Agricultural Relief or Business Relief (for example, if it’s part of a working farm or business), it won’t qualify for Woodland Relief.
Heritage assets – Some buildings, land and works of art which have historic or scientific interest may be exempt from IHT. The assets must be made available for the public to view and meet other conditions to qualify as exempt. Heritage assets can also be transferred to the Crown to pay an IHT bill.
Passing on a home – How much IHT is charged on a home depends on how the person who died owned it and how they passed it on.
Passing on a home as a gift – If a person passed on their home to their children (or someone else) before they died, it’s treated as a gift and the seven-year rule applies. But if they continued to live in it rent free, their estate has to pay Inheritance Tax on the home even if they lived for seven years after giving it away. This is known as a ‘gift with reservation of benefit’.
Giving away the home and moving out – The original owner can make social visits and stay for short periods in a home they’ve given away without affecting the seven-year rule.
Giving away part of the home to someone who moves in – If a person gave away half their home to their children (or someone else), who moved in and shared the bills, the half given away won’t be included in the valuation of the estate.
Giving away the home and living in it – If the original owner lives in the home after giving it away, they must pay the new owner a ‘market rent’ (the going rate for similar local rental properties).
Selling a home and giving away the money – If someone sold their home and gave the money to their children (or someone else), the money will be treated as a gift and the seven-year rule will apply. If they bought a new home as a joint owner with one or more others, the home may count as a ‘pre-owned asset’, and there may be Income Tax to pay on it.
Leaving a home in a Will – When a home was wholly owned by the person who died, the value of the whole home is included in the estate for IHT purposes. When a home was owned by more than one person, only the share owned by the person who died is included in the estate for IHT purposes.
Passing on a home to a husband, wife or registered civil partner – A widow, widower or bereaved registered civil partner automatically inherits the deceased’s share of the house if they owned the home as ‘joint tenants’. There’s no IHT if they continue to live in it. If they owned the home as ‘tenants in common’, each can pass on their share of the home to anyone else in their Will.
Second homes- If someone gives away a home that isn’t their main home, they may have to pay Capital Gains Tax if the value of it has increased since they first owned it.
Leaving assets to a spouse or registered civil partner – An estate is exempt from IHT if the deceased left everything to their husband, wife or registered civil partner who lives permanently in the UK. Married couples and registered civil partners can give any value of gifts to each other during their lifetime without IHT being due on them. This is known as ‘spouse or registered civil partner exemption’.
Transferring Inheritance Tax thresholds – If someone’s estate is less than the IHT threshold of £325,000, the remaining threshold can be transferred to their husband, wife or registered civil partner’s estate when they die – even if they remarried. This means the surviving partner’s estate can currently be worth up to £650,000 before any IHT is due. The transfer is made when the surviving husband, wife or registered civil partner dies, and is done by the executor of their Will or administrator of their estate when they work out how much it’s worth.
Exceptions
The rules for transferring a threshold are different if:
• The estate of the first spouse or registered civil partner qualified for relief on woodland or heritage assets
• The surviving spouse or registered civil partner had an unsecured pension as the ‘relevant dependant’ of a person who died with an Alternatively Secured Pension
• The first spouse or registered civil partner died before 1975
Keeping records
The executor or administrator of the estate should give the surviving husband, wife or registered civil partner documents that show any unused IHT threshold. These will be needed to transfer the threshold to the surviving partner’s estate when they die.