Inheritance Tax - the basics

Not everyone pays Inheritance Tax. It is only due if your estate - including any assets held in trust and gifts made within seven years of death - is valued over the current Inheritance Tax threshold (£325,000 in 2010-11). The tax is payable at 40 per cent on the amount over this threshold.

What is Inheritance Tax?

Inheritance Tax is usually paid on an estate when somebody dies. It's also sometimes payable on trusts or gifts made during someone's lifetime. Most estates don't have to pay Inheritance Tax because they are valued at less than the threshold (£325,000 in 2010-11).

Increased threshold for married couples and civil partners

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies - to as much as £650,000 in 2010-11. Their executors or personal representatives must transfer the first spouse or civil partner's unused Inheritance Tax threshold or ‘nil rate band' to the second spouse or civil partner when they die.

Who is responsible for paying Inheritance Tax?

Inheritance Tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased's estate. The trustees are usually responsible for paying Inheritance Tax on assets in, or transferred into, a trust. Sometimes people who have received gifts, or who inherit from the deceased, have to pay Inheritance Tax - but this is not common.

Valuing an estate to see if Inheritance Tax is due

To find out if Inheritance Tax is due on an estate, you must first value the estate. This means adding up the value of all the assets in the estate - such as a house, possessions, money and investments - and deducting any debts the deceased may have owed, including household bills and funeral expenses. An estate also includes the deceased's share of any jointly owned assets and the value of any assets held in trust. You should also evaluate any gifts that the deceased may have made in their lifetime to see if they are exempt, and if they aren't exempt, include them in the overall value of the estate (see more below).

Inheritance Tax exemptions and reliefs

Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay Inheritance Tax. Examples include:

 •• Spouse or civil partner exemption. Your estate usually doesn't owe Inheritance Tax on anything you leave to a spouse or civil partner who has their permanent home in the UK - nor on gifts you make to them in your lifetime - even if the amount is over the threshold.

 •• Charity exemption. Any gifts you make to a 'qualifying' charity - during your lifetime or in your will - will be exempt from Inheritance Tax (see more in the link below).

 •• Potentially exempt transfers. If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.

 •• Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount - you can also use your unused allowance from the previous year but you use the current year's allowance first.

 •• Small gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.

 •• Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.

 •• Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax is available.

Deadline for paying Inheritance Tax

 In most cases, you must pay Inheritance Tax within six months of the end of the month in which the deceased died. After this, interest will be charged on the amount outstanding. You can pay in annual instalments over ten years if the value of the estate is tied up in property such as a house. The due dates are different if you're paying Inheritance Tax on a trust.

Inheritance Tax and probate forms

 You have to fill out an Inheritance Tax form as part of the probate process (or confirmation in Scotland) even if no Inheritance Tax is due. Different forms are used depending on where the deceased lived, and whether there is any Inheritance Tax to pay. You must pay some or all of any Inheritance Tax due before you can get a grant of probate (or confirmation).

How to pay Inheritance Tax

There are various ways to pay the Inheritance Tax due on an estate, including paying on account or paying in instalments.

Transferring an unused Inheritance Tax threshold

Since October 2007, you can transfer any unused Inheritance Tax threshold from a late spouse or civil partner to the second spouse or civil partner when they die. This can increase the Inheritance Tax threshold of the second partner - from £325,000 to as much as £650,000 in 2010-11, depending on the circumstances.

How does the transfer work?

Everyone's estate is exempt from Inheritance Tax up to a certain threshold: £325,000 in 2010-11. This threshold is also known as the ‘nil rate band'. Married couples and registered civil partners are also allowed to pass assets from one spouse or civil partner to the other during their lifetime or when they die without having to pay Inheritance Tax - no matter how much they pass on - as long as the person receiving the assets has their permanent home in the UK. This is known as spouse or civil partner exemption. If someone leaves everything they own to their surviving spouse or civil partner in this way, it's not only exempt from Inheritance Tax but it also means they haven't used any of their own Inheritance Tax threshold or nil rate band. It is therefore available to increase the Inheritance Tax nil rate band of the second spouse or civil partner when they die - even if the second spouse has re-married. Their estate can be worth up to £650,000 in 2010-11 before they owe Inheritance Tax. To transfer the unused threshold, the executors or personal representatives of the second spouse or civil partner to die need to send certain forms and supporting documents to HM Revenue & Customs (HMRC). HMRC calls this ‘transferring the nil rate band' from one partner to another.

When can the threshold be transferred?

The threshold can only be transferred on the second death, which must have occurred on or after 9 October 2007 when the rules changed. It doesn't matter when the first spouse or civil partner died, although if it was before 1975 the full nil rate band may not be available to transfer, as the amount of spouse exemption was limited then. There are some situations when the threshold can't be transferred but these are quite rare.

How to make the claim

When the second spouse or civil partner dies, the executors or personal representatives of the estate should take the following steps.

Step 1: Work out what percentage of the threshold you can transfer

The size of the first estate doesn't matter. If it was all left to the surviving spouse or civil partner, 100 per cent of the threshold was unused and you can transfer the full percentage when the second spouse or civil partner dies even if they die at the same time. Note that it isn't the unused amount of the first spouse or civil partner's nil rate band that determines what you can transfer to the second spouse or civil partner. It's the unused percentage of the nil rate band that you transfer. If the deceased made gifts to people in their lifetime that were not exempt, the value of these gifts must first be deducted from the threshold before you can calculate the percentage available to transfer. You may also need to establish whether any of the assets that the first spouse left could have qualified for Business or Property Relief.

Step 2: Assemble documents from the first death to support a claim

You will need all of the following documents from the first death:

 •• a copy of the first will, if there was one

 •• a copy of the grant of probate (or confirmation in Scotland), or the death certificate if no grant was taken out

 •• a copy of any ‘deed of variation' if one was used to vary (or change) the will

If you need help finding these documents from the first death, get in touch with the relevant court service or general register office for the country you live in (see links below under ‘More useful links'). The court service may be able to provide copies of wills or grants; the general register offices may be able to provide copies of death certificates.

Step 3: Complete and send in the relevant forms

You'll need to complete form IHT402 to claim the unused threshold and return this together with form IHT400 and the forms you need for probate (or confirmation in Scotland). You must make the claim within 24 months from the end of the month in which the second spouse or civil partner dies.

Exceptions - when the rules are different

In the following two cases, the rules for transferring a threshold are different:

 •• if the estate of the first spouse or civil partner had qualified for relief on woodlands or heritage property

 •• If the surviving spouse or civil partner had an unsecured pension as the ‘relevant dependant' of a person who died with an Alternatively Secured Pension

The rules are complicated and you might want to contact the Probate and Inheritance Tax Helpline for advice.

Inheritance Tax thresholds

The Inheritance Tax threshold (or ‘nil rate band') is the amount up to which an estate will have no Inheritance Tax to pay. If the estate - including any assets held in trust and gifts made within seven years of death - is more than the threshold, Inheritance Tax will be due at 40 per cent on the amount over the nil rate band.

Who pays Inheritance Tax?

 Inheritance Tax is only owed if the value of the deceased's estate - or a transfer in connection with a trust - exceeds the Inheritance Tax threshold (£325,000 in 2010-11 tax year). The executor or personal representative usually pays the tax from the deceased's estate. The trustees usually pay the tax on trust assets.

When the executor pays Inheritance Tax

Usually, the executor, personal representative or administrator (for estates where there's no will) pays Inheritance Tax on any assets in the deceased's estate that are not held in trust. The money generally comes from the deceased person's estate. However, because the tax must be paid within six months of the death and before the grant of probate can be issued (or grant of confirmation in Scotland), sometimes the executor has to borrow the money or pay it from their own funds. This can happen if it hasn't been possible to get the money from the estate in time because it‘s tied up in assets that have to be sold. In these cases, the executor or the people who have advanced the money can be reimbursed from the estate before it's distributed among the beneficiaries (see the section below on ‘Recovering Inheritance Tax if you have paid it for someone else').

When a trustee pays Inheritance Tax

Inheritance Tax on transfers into trust is only necessary if the total transfer amount is above the Inheritance Tax threshold. It's usually payable by the person making the transfer(s) - known as the ‘settlor' - not the trustees. The trustees must pay any Inheritance Tax due on land or assets already held in trust. The occasions for this include:

 •• a transfer out of trust (known as the ‘exit charge')

 •• every ten years after the original transfer into trust (known as the ‘ten-year anniversary charge')

 •• when the beneficiary of the trust (known as the ‘life tenant') dies

When a beneficiary or a donee has to pay Inheritance Tax

If the executor or the trustees can't pay the Inheritance Tax, the beneficiaries or donees (recipients of gifts made during a person's lifetime) may have to pay it. A beneficiary or donee only has to pay Inheritance Tax in this case if:

 •• they receive a share of an estate after a death

 •• they receive a gift from someone who dies within seven years of making the gift

 •• they benefit from assets in a trust at the time of death or receive income from those assets

 •• they are the joint owner - other than a spouse or a civil partner - of a property

Here are some examples of when a beneficiary or donee might have to pay Inheritance Tax.

Example one

If someone gives you a gift and they do not survive for seven years after making the gift, you would only be liable to pay Inheritance Tax on that gift if the value of the estate - including the gift - is over the Inheritance Tax threshold (£325,000 in 2010-11 tax year) and there is not enough money in the estate to pay the Inheritance Tax. However, if all the gifts made by that person during the seven years before they died add up to more than the Inheritance Tax threshold (£325,000 in 2010-11 tax year) - just the gifts themselves not the rest of the estate - Inheritance Tax will be due on all of the gifts that brought the total above the threshold. In this case, you as the donee will usually have to pay the tax due on your gift.

Example two

Someone dies and they own property as ‘joint tenants' with you, but you are not their spouse or civil partner. Inheritance Tax may be payable on their share of the joint property if the total value of their estate is more than the threshold (£325,000 in 2010-11 tax year). As the surviving joint owner, you would be responsible for paying the Inheritance Tax. If the deceased said in their will that joint property held as ‘tenants in common' should be given ‘free of tax', the Inheritance Tax will come from the rest of their estate (if there is enough money in the estate to pay the tax). If there isn't, you will have to pay the difference.

Recovering your money if you paid Inheritance Tax for someone else

If you have paid the Inheritance Tax due on behalf of someone else, you are entitled to claim the money back from the estate or from whoever should have paid the Inheritance Tax. You can do this once probate (or confirmation) has been granted and before the estate is distributed among the beneficiaries

Tax when you inherit money, assets or property

When someone dies and leaves you money, assets or property, you usually won't have to pay any Inheritance Tax. This is because Inheritance Tax is generally paid out of the estate before you get your inheritance. However, in certain situations, you might have to pay other taxes.

Do you pay tax on an inheritance?

There are three types of tax you might have to pay in connection with an inheritance.

Income Tax

You might have to pay Income Tax if the items you inherit generate income for you. Examples include:

 •• interest earned on money

 •• dividends paid on shares

 •• rental income from renting out a property

Capital Gains Tax

You might have to pay Capital Gains Tax if you sell, give away or exchange an asset you've inherited and it's gone up in value since the date of death. The legal term for the many ways you can cease to own an asset is 'dispose of' assets. (In some cases you may be treated as if you've disposed of an asset that you still own - for example, if you receive compensation for a damaged antique.) If the asset you inherited increases in value between the date of the deceased's death and the date you dispose of it, the increase is a 'capital gain'. See more on this in the section below, and in our guides on Capital Gains Tax.

Inheritance Tax

You usually won't have to pay Inheritance Tax on money, assets or property you inherit. Inheritance Tax generally comes out of the deceased's estate before the inheritance is passed on. You will usually only owe Inheritance Tax on a legacy if either of the following applies:

 •• it says in the will that you should pay Inheritance Tax

 •• the deceased's estate can't pay it

How Inheritance Tax or other debts may affect inherited property

If you inherit a property from your spouse or civil partner, you're an 'exempt beneficiary' and you normally won't owe Inheritance Tax as long as you're domiciled in the UK. However, if you owned property jointly with the deceased and were not their spouse or civil partner, the deceased's executor or personal representative must pay any Inheritance Tax or debts before distributing the estate among the beneficiaries. They'll usually try to do this using funds from other parts of the estate. However, if there's a shortfall, you as the remaining owner are responsible for that shortfall and HM Revenue & Customs (HMRC) and other creditors have the right to approach you. If there isn't enough money in the rest of the estate to pay the outstanding tax or other debts, you may need to sell the property.

Capital Gains Tax when selling or 'disposing of' a property

If you inherit and dispose of a property you live in

If the inherited asset is a property that you live in as your main home from the time you inherit it to the time you sell or dispose of it, you may not have to pay Capital Gains Tax when you dispose of it. This is because any gain you make when you dispose of your main home may be free of Capital Gains Tax through 'Private Residence Relief', whereas a gain on any other home may not be.

If you inherit and dispose of a second property

You can only have relief from Capital Gains Tax for one property at a time, so if you inherit a second property and live in it as a home, you should nominate one of your homes as your main home. You should do this within two years of making one of them your main home and let your Tax Office know. If you don't nominate one of your homes as your main home and later sell or dispose of one of the properties, the decision as to which home was your main home will be made on the facts. You may have to pay Capital Gains Tax if the home deemed not to be your main home has increased in value.

Renting out an inherited property

If you decide to rent out the property, you'll have to pay Income Tax on any profit you make from the rental income - less rental expenses. You'll also have to follow relevant laws on the safety of the property and certain contents.

If you inherit money, assets or property in a trust

A trust is a way of holding and managing money, assets or property for the benefit of a person or group of people. If you inherit something in a trust, you are the beneficiary, but the trustee is the legal owner of whatever's held in the trust and is legally bound to deal with it as set out by the deceased in their will. The trustee will deal with the trust's tax affairs, but you may have to pay Income Tax on any income you receive from the trust. However if the trust is a bare trust, you are the legal owner as well as being the beneficiary.

Introduction to Inheritance Tax and trusts

Trusts may incur an Inheritance Tax charge when assets are transferred into or out of them or when they reach a ten-year anniversary. This guide looks at the key principles that determine whether a trust needs to pay Inheritance Tax in these situations.

What is Inheritance Tax?

Inheritance Tax is commonly understood as the tax paid on your estate when you die. However, it can also apply to your estate while you're alive, especially if you transfer some or all of it into a trust. The basic principles behind Inheritance Tax and trusts are explored below, but it is important to remember that Inheritance Tax is only paid on the value of assets above the Inheritance Tax threshold (£325,000 in 2010-11).

Inheritance Tax and settled property

The act of putting an asset into a trust is often known as 'making a settlement' or 'settling property'. For Inheritance Tax purposes, each item of settled property has its own separate identity. This means, for example, that one item of settled property within a trust may be for the trustees to use at their discretion and therefore treated like a discretionary trust. Another item within the same trust may be set aside for a disabled person and treated like a trust for a disabled person. In this case, there will be different Inheritance Tax rules for each item of settled property. Even though different items of settled property may receive different tax treatment, it is always the total value of all the settled property in a trust that is used to work out whether a trust exceeds the Inheritance Tax threshold and whether Inheritance Tax is due. You can find out about the Inheritance Tax rules for different kinds of trust in the guide below.

What events trigger an Inheritance Tax charge?

From a trusts perspective, there are four main occasions when Inheritance Tax may apply to trusts:

 •• when assets are transferred - or settled - into a trust

 •• when a trust reaches a ten-year anniversary

 •• when settled property is transferred out of a trust or the trust comes to an end

 •• when someone dies and a trust is involved when sorting out their estate

Each of these situations is explored in more detail in the following guides.

Property you pay Inheritance Tax on

You have to pay Inheritance Tax on 'relevant property'. Relevant property covers all settled property in most kinds of trust. But property in the following types of trust doesn't count as 'relevant property':

 •• interest in possession trusts with assets that were put in before 22 March 2006

 •• an immediate post-death interest trust

 •• a transitional serial interest trust

 •• a disabled person's interest trust

 •• a trust for a bereaved minor

 •• an age 18 to 25 trust

Property you don't pay Inheritance Tax on

Inheritance Tax is not paid on 'excluded property' (although the value of the excluded property may be brought in to calculate the rate of tax on certain exit charges and ten-year anniversary charges). Types of excluded property can include:

 •• property situated outside the UK that is owned by trustees and was settled by someone who was permanently living outside the UK at the time of making the settlement

 •• government securities, known as FOTRA (free of tax to residents abroad) The rules governing excluded property can be complicated. For further technical guidance, you can use the HM Revenue & Customs (HMRC) online Inheritance Tax manual.

Declaring and paying Inheritance Tax on trusts

There are two main forms you will need to use to declare and pay Inheritance Tax for your trust:

 •• IHT400 Inheritance Tax Account - used to show what Inheritance Tax is due when someone has died

 •• IHT100 Inheritance Tax Account - used to show what Inheritance Tax is due from 'lifetime events', for example a transfer into or out of a trust, or a ten-year charge on a trust

Get professional help for your trust

Understanding tax on trusts can be difficult. You might like to get professional advice from a tax adviser or solicitor to help you. However, if you do, remember that the trustees are still all legally responsible for ensuring that the trust's tax affairs are carried out satisfactorily. You'll find some links below to professional organisations - though not all professionals are registered with them.

Trusts that do and don't pay Inheritance Tax

Trusts containing ‘relevant property' pay Inheritance Tax on transfers out of the trust and on the trust's ten-year anniversary. This guide explains the Inheritance Tax rules for trusts with relevant property and trusts without it.

What is relevant property?

Trust property can include money, shares, houses, land or any other assets. Most property held in trusts counts as relevant property. The relevant property contained within the trust is potentially liable for a charge when:

 •• it is transferred out of a trust (exit charges)

 •• a ten-year anniversary occurs

The only exceptions to this rule are when property is:

 •• put into interest in possession trusts before 22 March 2006

 •• subject to a ‘transitional serial interest' made before 5 October 2008

 •• set aside for a disabled person

 •• set aside for a bereaved minor

 •• put into an age 18 to 25 trust

How these exceptions apply is looked at in more detail in the sections below.

Assets put into interest in possession trusts before 22 March 2006

From an Inheritance Tax perspective, an ‘interest in possession' trust is one where a beneficiary has the right to use the property within the trust or receive any income from it. Assets put into an interest in possession trust before 22 March 2006 are not considered to be relevant property, so there is no ten-yearly charge.

During the life of the trust there are no exit charges as long as the asset stays in the trust and remains the ‘interest' of the beneficiary.

If the trust also contains assets put in on or after 22 March 2006, these assets are treated as relevant property and are potentially liable to the ten-yearly charges.

Transitional serial interest trusts and Inheritance Tax

Before 5 October 2008, beneficiaries of an interest in possession trust could choose to pass on their interest in possession to other beneficiaries, for example their children. This was called making a ‘transitional serial interest'. (There were no Inheritance Tax charges on assets moved into a transitional serial interest trust.) If a transitional serial interest trust was set up before the October deadline, the new beneficiaries can continue to benefit from the old Inheritance Tax rules for interest in possession trusts. In other words, the assets don't count as relevant property. This means there is no ten-yearly charge. Again, as long as the asset stays in the trust and remains the ‘interest' of the beneficiary there will be no exit charges. From 5 October 2008 existing beneficiaries of an interest in possession trust can no longer choose to make a transitional serial interest. In this case the assets are regarded as ‘relevant property' and are potentially liable to the ten-yearly charges.

Immediate post-death interests and Inheritance Tax

If someone acquires an interest in possession from a beneficiary who has died - either through the beneficiary's will or through the rules of intestacy - the assets don't count as ‘relevant property' and the beneficiary will continue to be treated according to the old rules for interest in possession trusts. This means there is no ten-yearly charge. Exit charges are not a consideration - so long as the asset stays in the trust and remains the ‘interest' of the beneficiary.

Trusts for bereaved minors and Inheritance Tax

A bereaved minor is a person aged under 18 who has lost at least one parent or step-parent. Where a trust is set up for the benefit of a bereaved minor the assets in the trust are not regarded as relevant property - and so there are no ten-yearly or exit charges - providing that:

 •• the assets in the trust are set aside for the exclusive benefit of the bereaved minor

 •• the beneficiary becomes fully entitled to the assets in the trust at the age of 18 at the latest

18 to 25 trusts and Inheritance Tax

The Finance Act 2006 introduced a new category of age '18 to 25 trusts'. A trust for a bereaved young person can also be set up as an 18 to 25 trust.

As with a trust for a bereaved minor the ten-yearly and Inheritance Tax exit charges don't apply for an 18 to 25 trust. However, the main differences are:

 •• the beneficiary must become fully entitled to the assets in the trust by the age of 25

 •• during the time that the beneficiary is aged between 18 and 25 Inheritance Tax exit charges will apply (the ten-yearly charge doesn't apply because the trust will only be liable for Inheritance Tax during a seven-year period)

Trusts for disabled beneficiaries and Inheritance Tax

A trust set up for someone with a mental or physical disability is not considered a relevant property trust. This means there is no ten-yearly charge. Exit charges are not a consideration - so long as the asset stays in the trust and remains the ‘interest' of the beneficiary. Transfers of assets into a disabled trust are also exempt from Inheritance Tax if the person making the transfer survives for seven years after making the transfer. (These sorts of transfers are called ‘potentially exempt' transfers.)

Bare trusts and Inheritance Tax

A bare trust, also known as a 'simple trust', is one in which each beneficiary has an immediate and absolute right to both capital and income. The beneficiaries of a bare trust have the right to take actual possession of trust property. For Inheritance Tax purposes, the contents of the trust are treated as belonging to the beneficiary so they are not regarded as ‘relevant property' and there are no ten-yearly charges or exit charges. Furthermore, transfers into a bare trust may also be exempt from Inheritance Tax, providing the person making the transfer survives for seven years after making the transfer.

Bare trusts

With bare trusts the beneficiary has an immediate and absolute entitlement to both capital and income in the trust. Beneficiaries will have to pay Income Tax on income that the trust receives. They may also have to pay Capital Gains Tax and Inheritance Tax.

What is a bare trust?

A bare trust (sometimes known as a 'simple trust') is one where the beneficiary - the person who benefits from the trust - has an immediate and absolute right to both the trust capital and the income received by the trust from that capital. Someone who sets up a bare trust can be certain that the assets they set aside will go directly to the beneficiaries they intend, because, once the trust has been set up, the beneficiaries cannot be changed. The trust assets are held in the name of a trustee (the person administering the trust), but the trustee has no discretion over what income or capital to pass on to the beneficiary or beneficiaries. Bare trusts are commonly used to transfer assets to minors. Trustees hold the assets on trust until the beneficiary is 18 in England and Wales, or 16 in Scotland. At this point, beneficiaries can demand that the trustees transfer the trust fund to them.

Example

Gary leaves his sister Juliet some money in his will. The money is to be held in trust. Juliet is the beneficiary and is entitled to the money and any income (such as interest) it earns. She also has a right to take possession of any of the money at any time. This is a bare trust because Juliet is absolutely entitled to both the capital (the original money put into the trust) and the income (any interest earned).

Bare trusts and Income Tax

The assets of a bare trust are treated for tax purposes as if the beneficiary holds the trust property in their own name and the beneficiary is liable to Income Tax on income received. The beneficiaries of a bare trust need to account for any Income Tax or Capital Gains Tax on their Self Assessment tax return. They do this on the sections of the form SA100 that deal with income, not the SA107 Trusts etc supplementary pages. Although trustees can pay Income Tax on behalf of a beneficiary, it is still the beneficiary who is liable for the tax.

Capital Gains Tax on a bare trust

Capital Gains Tax is a tax payable on ‘gains' (profits) above a certain level made from the sale of assets such as shares, property or possessions. It is charged on any gains greater than the ‘annual exempt amount', which is set each year. In a bare trust, Capital Gains Tax is charged on the beneficiary, as if the trust did not exist. The beneficiary must declare any chargeable gains on their personal Self Assessment tax return.

Inheritance Tax on a bare trust

For Inheritance Tax purposes, assets placed in a bare trust are treated as ‘potentially exempt transfers'. This means that they are usually only subject to Inheritance Tax if the settlor who put the assets into the trust dies within seven years of doing so. In this case, since the capital and income of a bare trust belong absolutely to the beneficiary, the beneficiary is responsible for any Inheritance Tax that may be due.

Inheritance Tax on transfers into trust

Inheritance Tax may be due when assets are put into a trust. How much depends on the type and value of the trust, the value and timing of the transfer and whether the donor continues to benefit from the gift.

What is a transfer into trust?

The person who puts assets into a trust is known as a 'settlor'. A transfer of assets into a trust can include property, land or cash in the form of:

 •• A gift made during a person's lifetime.

 •• A transfer or transaction that reduces the value of the settlor's estate (for example an asset is sold to trustees at less than its market value) - the loss to the person's estate is considered a gift or transfer.

 •• A 'potentially exempt transfer' - whereby no further Inheritance Tax is due if the person making the transfer survives at least seven years. For transfers after 22 March 2006 this will only apply when the trust is a disabled trust.

 •• A 'gift with reservation' - where the transferee still benefits from the gift (see the section below).

Working out if Inheritance Tax is due

For most types of trust Inheritance Tax is due on transfers that exceed the Inheritance Tax threshold. You work this out by adding the value of the transfer (which is based on the loss in value to the settlor's estate) to any chargeable gifts made in the previous seven years by the settlor and paying tax on everything above the threshold (£325,000 in 2010-11 tax year). If the trustees pay, the rate is 20 per cent. If the settlor pays the Inheritance Tax instead of the trustee, the loss to the settlor's estate is increased by the amount of tax due. Calculations are complex but effectively this means that the settlor pays at a rate of 25 per cent.

Example

A transfer of £50,000 is made into a trust in June 2008. In the previous seven years the settlor had made gifts of £300,000. So, the Inheritance Tax due is:

 •• the value of the transfer + chargeable gifts = (£50,000 + £300,000) = £350,000

 •• less the Inheritance Tax threshold = (£350,000 - £312,000) = £38,000

 •• if the tax will be paid by the trustee, multiply by the Inheritance Tax rate = (£38,000 x 20 per cent) = £7,600

 •• if the tax will be paid by the settlor = £38,000 x 25 per cent = £9,500

How you pay your Inheritance Tax

If your transfer into a trust incurs an Inheritance Tax charge, you will need to fill in form IHT100 and complete a separate event form, IHT100a, which covers gifts and other transfers of value.

Death within seven years of making a transfer

If you die within seven years of making a transfer into a trust extra Inheritance Tax will be due at the full amount of 40 per cent (rather than the reduced amount of 20 per cent for lifetime transfers). In this case your personal representative - who manages your estate when you die - will have to pay a further 20 per cent out of your estate on the value of the original transfer.

If no Inheritance Tax was due when you made the transfer, the value of the transfer is added to your estate when working out whether any Inheritance Tax is due.

Inheritance Tax if you retain a benefit after making a gift into a trust

If you make a gift to any type of trust but continue to benefit from the gift - for example, you give away your house but continue to live in it - you will pay 20 per cent on the transfer and the gift will still count as part of your estate. These are known as gifts 'with reservation of benefit'.

This creates a situation where there are two potential Inheritance Tax charges:

 •• when the gift is transferred into a trust

 •• when the person who makes the transfer dies - because the asset is still considered part of their estate

To avoid double taxation, only the higher of these charges is applied - in other words you won't ever pay more than 40 per cent Inheritance Tax. However, if the person who retains the benefit gives this up more than seven years before dying, the gift is treated as a potentially exempt transfer. In other words, there is no further liability if the transferor survives for a further seven years.

Gifts into a trust for someone who is disabled

You don't have to pay Inheritance Tax immediately if you make a gift to a trust for someone who is disabled. However, bear in mind that these sorts of gift count as 'potentially exempt transfers'. This means that if you die within seven years of making the gift, Inheritance Tax on the full amount of the transfer will still be due on your estate at 40 per cent. You can read about how Inheritance Tax applies to trusts for someone who is disabled in our guide below.

Inheritance Tax due on ten-year anniversaries

Inheritance Tax is due on assets within certain trusts at each ten-year anniversary. This guide explains which trusts the charge applies to and when you need to pay this charge. It also tells you what information you need to do the calculation yourself and how your Tax Office can help.

What is the ten-year anniversary charge?

As a trustee, you may have to pay a regular charge on every tenth anniversary of the date your trust was set up, if both of the following apply:

 •• the value of your trust is above the Inheritance Tax threshold (£325,000 for the tax year 2010-11)

 •• your trust is a 'relevant property trust'

The ten-year charge is also known as the 'principal charge' or 'periodic charge'.

What is a relevant property trust?

A relevant property trust is any trust that is not one of the following:

 •• an immediate post-death interest

 •• a transitional serial interest

 •• a disabled person's interest

 •• a trust for a bereaved minor

 •• an age 18 to 25 trust

 •• an interest in possession (before 22 March 2006)

You can read about how Inheritance Tax applies to the above trusts in our guide below.

Working out what Inheritance Tax is due

Assets that are placed in - or 'settled into' - a relevant property trust are often referred to as 'relevant property'. Inheritance Tax is charged at each ten-year anniversary on the value - after allowing for any business or agricultural relief - of any relevant property in the trust on the day before that anniversary. The calculation for the ten-yearly charge is complicated. Before you can begin, you will need to know the following information:

 •• the value of the relevant property in the trust on the day before the ten-year anniversary

 •• the value - at the date it entered the trust - of any trust property that has not at any time been relevant property while remaining in this trust

 •• the value of all other transfers into other trusts made by the settlor on the same day as the trust in question was set up, valued at the date they were added

 •• the value of all other transfers chargeable to Inheritance Tax that the settlor made in the seven years before the trust in question was set up, valued at the date they were made (whether into trusts or not)

 •• the value of any transfers out of the trust within the last ten years on which an exit charge has been paid

Once you have this information there will be a different calculation depending on whether:

 •• all of the relevant property has been in the trust for more than ten years

 •• some of the relevant property has not been in the trust for ten years at the time of a trust ten-year anniversary

 •• the trust was, at some point in the last ten years, a different kind of trust that was not liable to relevant property charges, eg an accumulation and maintenance trust

Doing the anniversary charge calculation yourself

You will need to declare and pay most Inheritance Tax charges incurred by your trust using form IHT100 Inheritance Tax Account. If you want to do the calculations yourself, you need to enter your figures into Sections G and H of form IHT100. HM Revenue & Customs (HMRC) publishes a calculation worksheet that includes guidance notes to help you work out how much Inheritance Tax you will need to pay on:

 •• transfers into trust

 •• transfers out of trust

 •• trust ten-year anniversaries

To calculate the anniversary charge, you will need to use section B of form IHT100WS Inheritance Tax worksheet. You can get further help filling in this section of the worksheet with part B of the guide IHT113 'How to fill in form IHT100WS'.

Getting HMRC to do the calculation for you

If you want HMRC to calculate the anniversary charge for you, fill in form IHT100 leaving sections G and H blank. You will need to ensure you return the form to the Inheritance Tax Office in Nottingham in good time for the calculation to be worked out - otherwise you may incur a penalty charge. Please note, whether you do the calculation yourself or whether HMRC does it, you will still need to complete an event form IHT100d for the ten-year anniversary - in addition to the main form IHT100.

Inheritance Tax on assets transferred out of trust

Inheritance Tax may be due when assets leave a trust. This guide explains what constitutes a transfer and when you need to pay the exit charge. It also tells you what information you need to do the calculation yourself and how your Tax Office can help.

The Inheritance Tax exit charge

Inheritance Tax is charged up to a maximum of 6 per cent on assets - or ‘property' - that is transferred out of a trust. The exit charge, which is sometimes called the ‘proportionate charge', applies to all transfers of ‘relevant property'. You'll find a link to an explanation of what qualifies as relevant property below.

What is a transfer out of trust?

A transfer out of trust can occur when:

 •• the trust comes to an end

 •• some of the assets within the trust are distributed to beneficiaries

 •• a beneficiary becomes absolutely entitled to enjoy an asset

 •• an asset becomes part of a ‘special trust' (for example a charitable trust or trust for a disabled person) and therefore ceases to be ‘relevant property'

 •• the trustees enter into a non-commercial transaction that reduces the value of the trust fund

Exceptions to the Inheritance Tax exit charge

There are some occasions when there is no Inheritance Tax exit charge - these apply even where the trust is a ‘relevant property' trust. For instance, it isn't charged:

 •• on payments by trustees of costs or expenses incurred on assets held as relevant property

 •• on some payments of capital to the beneficiary where Income Tax will be due

 •• when the asset is transferred out of the trust within three months of setting up a trust, or within three months following a ten-year anniversary

 •• when the assets are ‘excluded property' - foreign assets have this status if the settlor was domiciled abroad

Calculating the Inheritance Tax exit charge

The calculations for the Inheritance Tax exit charge are complicated. You will need the following information before you can begin:

 •• the value - before any reliefs - of all the assets transferred into the trust in question, valued at the date they were added

 •• the value of all other transfers into other trusts made by the settlor on the same day as the trust in question was set up, valued at the date they were added

 •• the value of all transfers chargeable to Inheritance Tax that the settlor made in the seven years before the trust in question was set up, valued at the date they were made

Once you have this information there will be a different calculation depending on whether:

 •• the transfer out of the trust occurs during the first ten years of a trust's life

 •• the transfer out occurs after the first ten years

 •• the trust is an ‘18 to 25 trust'

Doing the exit charge calculation yourself

You will need to declare and pay most Inheritance Tax charges incurred by your trust using form IHT100 Inheritance Tax Account. If you want to do the calculations yourself, you need to enter your figures into Sections G and H of form IHT100. HM Revenue & Customs (HMRC) publishes a calculation worksheet that includes guidance notes to help you work out how much Inheritance Tax you will need to pay on:

 •• transfers into trust

 •• transfers out of trust

 •• trust ten-year anniversaries

To calculate the exit charge, you will need to use section B of form IHT100WS Inheritance Tax worksheet. You can get further help filling in this section of the worksheet with part B of the guide IHT113 ‘How to fill in form IHT100WS'.

Inheritance Tax and trusts following a death

When someone dies, the job of managing their estate may involve trusts. The deceased may have wanted their assets put into trust when they die. Or part of their estate may have already been held in trust. This guide looks at the Inheritance Tax implications for personal representatives.

Dealing with a trust when someone dies

Settling someone's estate can be complicated. Amongst their many duties, the person nominated to sort out the deceased's estate (the ‘personal representative' who can be either an ‘executor' or an ‘administrator') must know the total value of the estate and pay Inheritance Tax on everything above the Inheritance Tax threshold (£325,000 for the tax year 2010-11). This can become more complicated when a trust is involved. There are three main ways that a personal representative may have to deal with a trust when thinking about paying Inheritance Tax.

Inheritance Tax when the deceased was the beneficiary of a trust

Some trusts are set up so that the beneficiary has ownership or legal entitlement to the income or assets in the trust. This will affect what's included in the estate of the beneficiary when they die.

Beneficiary of a bare trust

A bare trust is one where the beneficiary is entitled to both the income and the assets in the trust. Therefore, when they die, both income and assets are considered part of their estate. A personal representative needs to account for the value of the beneficiary's estate, including their stake in the bare trust, on form IHT400. This form will determine whether there is Inheritance Tax to pay or not.

Beneficiary of an interest in possession trust

An interest in possession trust is one where the beneficiary is entitled to only the income from a trust. When they die, there are certain circumstances where the value of this ‘interest in possession' is calculated as part of their estate. These include when the trust:

 •• was set up before 22 March 2006

 •• was set up after 22 March 2006 and was either an ‘immediate post death interest', a ‘disabled person's interest' or a ‘transitional serial interest'

A personal representative needs to account for the value of an ‘interest in possession' on form IHT400 at questions 45 and 75. The personal representative will need to liaise with the trustees to obtain this information. This will determine whether there is Inheritance Tax to pay or not. Note that it is the trustees' duty to complete an IHT100 Inheritance Tax Account form, which must also be completed when an interest in possession comes to an end.

Inheritance Tax when the deceased transferred assets into a trust before they died

Lifetime transfers of assets into a trust may incur an immediate Inheritance Tax charge of 20 per cent (depending on certain factors - follow the link at the end of this section to check the rules). However, a further Inheritance Tax charge may be due on the same transfers if the person who made them dies within seven years. The personal representative must therefore find out whether the deceased made any transfers into trust in the seven years before they died. If they did, and they paid 20 per cent Inheritance Tax, the personal representative is liable for an additional 20 per cent. This applies for every relevant transfer. The personal representative must declare this on form IHT400 at question 28. Even if no Inheritance Tax was due on the transfer its value must be added to the deceased's estate for Inheritance Tax purposes.

Inheritance Tax where a trust is set up by a will

Someone may request in their will that, when they die, some or all of their assets are placed in a trust. A trust that is set up under these circumstances is known as a ‘will trust'. Where there is a will trust, the personal representative must ensure that the trust is set up properly and all taxes are paid on assets going into it. Once set up, it is the trustees' duty to account for Inheritance Tax on any subsequent transfers into or out of the trust. They do this using the IHT100 Inheritance Tax Account form.

For further information visit the HMRC website.

Using wills and probate in genealogical research.

One of the best ways of gleaning information about family relationships is via an individual's will, which usually contains specific bequests to family members. Before 1858, the executor or executrix would register the will in the relevant ecclesiastical court to obtain a grant of probate, thereby allowing the bequests to be fulfilled. After 1858 a Central Court of Probate was established, where all wills for England and Wales were registered. Nowadays wills are registered at the Principal Probate Registry. If an individual died without a will, then letters of administration would be granted permitting the heir at law or next of kin to dispose of the estate. Furthermore, from 1796, death duty was payable on the estate, and the registers often detail next of kin, as well as later annotations.

In terms of locating family members, wills are the most important of the sources you are likely to find. In England and Wales you will find separate will registers for the Prerogatives Courts of Canterbury (at The National Archives) and York (at the Borthwick Institute, York) that go up to 1858. Thereafter all English wills have been registered centrally (and copies of wills can be obtained from the Principal Probate Registry, London).

Wills registered in local diocesan courts can be found at the relevant county or diocesan record office. A separate system exists in Scotland, and its records can be found in Edinburgh. Irish wills are mainly kept in Dublin, with copies available in Belfast (although most wills prior to 1914 have been destroyed).

Working with wills

The following are crucial hints on working with wills:

Remember to use probate copies. Handwriting on original wills may be awkward to decipher, so it may be easier to check the registered copies in the probate courts, where more legible (usually) copies will have been created.

Be flexible about date of death. Wills are not always found listed in the same year that a person died, as the actual grant of probate can take some time. It is always worth checking lists from a year or two after a known date of death, especially for disputed wills, which can take even longer.

Remember exceptions. You should be able to obtain the names of family members who received bequests in any will, along with their relationship to the person who wrote it. However, important members are sometimes excluded - as may be the case with an heir at law, who would naturally receive the estate without the need for a bequest. Hence the first born or eldest surviving male may actually be omitted from the will.

Avoid assumptions. Never assume you are receiving all the facts - corroborate your findings against other sources.

The wider picture

There are many other sources of information. Look at other articles on this site (see right) to find out more about them, particularly about census records ('The Census and How to Use It'), and about sources relating to people who served in the armed forces ('Tracing Military Records').

Don't forget the informal research tools that can help you too, such as the gravestones in your local church, or newspapers, postcards and letters you may find at home. These sorts of tools are described in more detail in 'Getting Started on Your Family Tree' and 'Tracing Military Records'.

The information in this article is for beginners, and will help you take your first steps to finding out about your ancestors. If your case is a reasonably simple one, you will be able to make a very satisfying family tree.

About the author

Dr Nick Barratt worked at the Public Record Office (now The National Archives, or TNA) from 1996 to 2000, with the family history team. He has given many talks on family history, and has written frequently for the TNA's genealogy journal, Ancestors. He has worked for the BBC as a specialist researcher on programmes such as 'One Foot in the Past','The People Detective' and 'Who Do You Think you Are?'.

Discover Why a Significant Percentage of WILLs are NOT Executed!

When you travel for holiday or business trips, do your loved ones know the location of your legal WILL?

Even today, as you commute to and from work, do they know where to find your last WILL and testament?

What would happen if both husband and wife meet with an accident and die together? Do their parents or siblings know the location of their Wills?

We received countless emails from people of different nationalities and cultures. Some requested our help to locate the Wills of both their aged parents who met with a fatal accident. They knew their parents have written their Wills, but no one knows where the Wills are kept.

Similarly, we also received emails where the unthinkable happened to parents of young children. The siblings of the deceased are unable to find the Wills and these young children are left behind without ever knowing their parent's Will.

The problems are very real from the emails we received. Many related their heartfelt stories and we are saddened that many Wills are not found.

Solicitors worldwide will tell you that a significant percentage of legal WILLs, are NOT executed because they CANNOT be found.

Recent comment from a solicitor: "During my regular Will writing seminars, which I conduct on a monthly basis, the common question that always surfaces from the audience is how would their love ones ever found out where the Will was kept. This question always baffles me until I chanced upon your website."

Recent comment from a financial adviser: "An important component of estate planning is to plan for the unthinkable. If it happens, the loved ones of our clients must know where the Wills are kept. Unfortunately, many don't or don't border until it's too late. When I came across Global Will Registry, I knew I found the solution for many of my clients. It's a small, but critical step to close the loop in estate planning."

Too often after a Will is written, many ignore the most important step, i.e. to communicate the Will location not just to their spouses, but to other loved ones as well. Many procrastinate until it is too late. Sometimes, even those who have communicated the whereabouts of their legal WILL find that their loved ones may have forgotten where their last Wills are kept (as years pass). We understand that keeping track of loved ones Will location is a challenge for many families. It is even more prevalent in today's globalized world where family members reside in different countries (or states) for work or other opportunities; knowing the Will locations of family members becomes even more complex. So, how to protect your legal WILL, even if your loved ones forget its location?

The easiest and most cost effective way is to register your last WILL location with an EASY-TO-REMEMBER global WILL registry. And communicate to your loved ones to check the WILL registry when the time comes. You or any of your loved ones may have reside abroad or in other states. You may have changed your WILL or WILL location countless number of times. With a global WILL registry, it is very easy for your loved ones to track the location of your WILL anywhere and anytime, if the unthinkable happens. Remember: knowing where your legal WILL is located differs from knowing the contents of the WILL. One must be communicated, while the other may be kept confidential. You can include other important information like living will, deeds, power of attorney and other final instructions for your loved ones in the member's area.

Writing a WILL is just the beginning. What's even more important is to communicate the latest WILL location to your loved ones! Register with Global WILL RegistryTM NOW to Help Loved Ones Find Your WILL Easily, whenever you are!

23 October 2007

Lasting Powers of Attorney

This week we welcome a new product to our portfolio - the Lasting Power of Attorney. Brought about by a change in the law in the form of the Mental Capacity Act, this document replaces the Enduring Power of Attorney. It is more complicated and costly to establish but brings benefits and additional control for the individual creating the document. Ask us for further information. New fact sheets will become available soon. If you have immediate questions contact us now.

19 October 2007

The Chancellor's Pre Budget Report - Major Changes The Pre Budget Report announced some important changes to Inheritance Tax (IHT).

Married couples and Civil Partners can now transfer their unused first death Nil Rate Band allowance to the survivor obviating the need for Nil Rate Band Discretionary Trust Wills. However, protecting assets from issues such as long term care fees and re-marriages, as well as ensuring your assets are inherited by your chosen beneficiaries, are as prominent as ever.

The change to the IHT rules has allowed our team to create a new trust, the Asset Protection Trust. This new trust allows clients to protect their assets for their loved ones whilst still benefiting from the tax efficiency created under the new IHT rules.

Wed, September 12 2007

Wills' time-bomb must be defused - says NCC Urgent action is needed to defuse a looming ‘wills' time-bomb - warns the National Consumer Council (NCC) today.

New research reveals more than 27 million people in England and Wales do not have a will and those who need one the most are the least likely to have one. Unmarried couples are most at risk of losing property, personal possessions and cash if their partner dies without leaving a will, as current inheritance laws do little to protect new family structures.

Four out of five parents who have not yet made a will are gambling with their children's future. Should both parents die unexpectedly, the courts may be left to decide who should look after their children.

Finding the will: a report on will-writing behaviour in England and Wales exposes how apathy is the primary cause of inaction. Most people say they simply haven't got around to making a will, have never thought about it or don't want to think about dying. NCC is calling on government and industry to find new ways to encourage more people to plan for the inevitable. Steve Brooker from the NCC explains,

‘Dying without leaving a will can leave all sorts of headaches for those left behind. It can create family feuds and leave relatives short of their inheritance.' ‘One million people have already fallen through the safety net provided by the inheritance laws, or know someone who has. With family structures changing, government and business must act now before millions more suffer.'

The survey of more than 2,500 people in England and Wales highlights how:

 • More than four in five cohabitating couples have not made a will (83 per cent);

 • Almost four in five households with dependent children have not made a will (79 per cent);

 • Only 27 per cent of people on low-incomes have a will - compared to 70 per cent of higher earners;

 • Only 12 per cent of people from Black and Minority Ethnic groups have a will compared to 39 per cent of the rest of the population.

NCC recommends that the Ministry of Justice targets and encourages these vulnerable groups to make a will - using a social marketing approach. It is also calling on the Ministry to review whether current inheritance laws remain fit for purpose.

The report highlights the need for industry to take advantage of the £250 million untapped will-writing market, by finding new and innovative ways of encouraging people to think ahead.

Wills explained: tips for consumers -- Why make a will? Problems when dying without a will

 • You take control over how your estate is to be distributed when you die. If you die without a will, the law dictates who the estate goes to, which might not be consistent with your personal wishes.

 • If there are people who depend on you, such as children, you can decide who will take responsibility for them should you die.

 • You can express your wishes about funeral arrangements

 • You can choose who will sort out your affairs when you die. Sorting out an estate is an important responsibility but it can also be a stressful experience - it's important to choose someone who is willing and up to the task.

 • If there is no will, it may take longer and cost more to sort things out.

 • You can reduce your Inheritance Tax liability.

 • Cohabitants have no automatic right to inheritance unless the partnership has been registered under the Civil Partnership Act, although it might be possible for them to claim a share of the estate.

 • If a marriage has broken down, but a divorce has not been finalised, the surviving spouse might inherit the whole or part of the estate.

 • If the family home is worth more than £125,000, it might have to be sold in order to pay out surviving relatives.

 • The courts may appoint guardians of children under the age of 18, if they are not identified in a will.

 • Trusts might have to be set up; while these may provide important safeguards, the terms may be restrictive and the legal costs of setting them up could be expensive.

 • When the transfer of property exceeds £300,000 in value, the amount over this sum may attract inheritance tax of 40 per cent; wills can be used to pass on an estate tax-efficiently. Ways of making a will Consumers can make a will in different ways by using:

 • a solicitor;

 • a specialist will-writing adviser;

 • non-legal organisations, such as banks and charities;

 or

 • Handwriting your own will using a pre-printed form purchased from a company but people should seek professional advice if:

 o Your personal circumstances are complicated, for example, you have remarried and have children from a previous marriage.

 o There are people who are financially or otherwise dependent on you.

 o The value of your estate exceeds £300,000, so you can minimise the tax burden.

 o You have assets held outside the UK.

 o There is a business involved.