Inheritance Tax Client Guide

Subject to any available exemptions, an individual can leave up to £325,000 (standard nil rate band) until at least 5 April 2021 to his or her heirs without the estate suffering IHT (see the section headed ‘Exemptions’). In April 2017, an additional residence nil rate band (RNRB) was introduced if a residence is left to a direct descendant and certain conditions are met. Married couples and registered civil partners can each transfer, on death, any unused nil rate band and RNRB to their surviving spouse or civil partner (see the section headed ’Transferring the nil rate band and residence nil rate band‘).

On your death, your estate valued in excess of the available nil rate bands will be liable to IHT at 40%. A lower rate of 36% can apply if you leave at least 10% of your net estate value to charities.

Valuing your estateOn death, all the assets that you owned must be valued. Assets include items such as money in a bank, property and land, jewellery, cars, shares, a pay-out from an insurance policy not held in trust and your share of any jointly owned assets. Some gifts also need to be included (such as cash or other assets) if they were given away in the seven years before your death, or they were given away at any time but you could still benefit from the asset.

After adding up the value of all your assets, you are entitled to deduct any debts and liabilities, such as household bills, mortgages, credit card debts, gambling debts and funeral expenses.

Gift with reservation of benefit Sometimes assets can be gifted with ’strings attached‘; for example, you give your house to a child but continue to live in it rent-free. These are known as ‘gifts with reservations of benefit’ (GWR) and the value of that gifted property at the time of your death needs to be included as part of your estate on death.

Nil rate band and residence nil rate band Once the value of your estate has been established, the next step is to determine how much IHT is due. Remember, not everyone pays IHT.

Any part of your estate that falls within the standard nil rate band (NRB) (currently £325,000) is taxed at zero. Anything in excess of this amount is taxed at 40%.

In addition to the NRB, from 6 April 2017 you can pass your home to direct descendants and potentially receive an additional allowance: the residence nil rate band (RNRB).

Direct descendants include your children, grandchildren, remoter descendants and their spouses or civil partners, including a widow(er) or surviving civil partner who has not remarried or entered into a new civil partnership. It also includes a step, adopted or fostered child or a child to which you were appointed as a guardian or a special guardian when the child was under 18.

Direct descendants do not include your nephews, nieces, brothers, sisters or any other relative not listed above.

Initially, the RNRB was set at £100,000 but increased by £25,000 each year until it reached £175,000 in April 2020, after which time it should increase each tax year in line with the consumer prices index.

Transferring the nil rate band and residence nil rate bandOn your death, if you have not used your NRB and/or RNRB, the unused percentages can be claimed by the executors of your spouse or civil partner when they die, increasing their nil rate bands. For example, if a husband dies and leaves his estate to his widow, all of his estate will be exempt ( see the section headed ’Exemptions’ ). This will mean that the executors of the widow’s estate can take his unused NRB and RNRB and add it to her own.

Inheritance Tax Introduction

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Inheritance Tax (IHT) is a tax levied against the value of an individual’s estate on death and also, in some circumstances, on gifts made during their lifetime.

Exemptions1. On death and during lifetime

You can give any amount, tax free, to your spouse or civil partner both during your lifetime and on your death. However, if your spouse or civil partner is not domiciled in the UK, a maximum tax-free gift limit of £325,000 applies irrespective of when the gift was made.

Charities and political parties

All gifts and bequests to UK charities and political parties are exempt from IHT. Since 5 April 2012, charitable bequests, on death, can also result in the IHT tax rate on your estate being cut to 36%, provided those bequests total at least 10% of your net estate.

2. Lifetime only

Annual Exemption

Each tax year you can make tax free gifts of up to £3,000, which can cover any type of lifetime gift in whole or part. If you don’t use this exemption it can be carried forward for one year. However, you can only use the carried forward amount after the current year’s £3,000 has been fully used.

Small Gift Exemption

You can make any number of outright tax free gifts of up to £250 – useful if you have lots of grandchildren. It cannot be combined with any other exemption, so you could not give a grandchild £3,250, for example, using both the annual exemption and this exemption.

Wedding/Civil Partnerships

As a parent you can make a tax free gift up to £5,000 when your child gets married or becomes a civil partner. Grandparents and great-grandparents can gift up to £2,500 and anyone else £1,000. The gift must be made on or shortly before the date of the wedding or civil ceremony.

Normal expenditure out of income

Any gifts out of income, not capital, are exempt if:

• They are regular and part of your usual expenditure (for example, paid by direct debit)

• You are still able to fund your normal household expenditure out of your post gift income without drawing on capital.

If you are gifting payments that you have received from an investment bond, you cannot use this exemption as those payments are treated as capital not income.

Potentially Exempt Transfers

Whilst there are some gifts that are exempt immediately, there are others that are not totally exempt until you have survived for seven years after making the gift – these are known as potentially exempt transfers (PETs). The most common form of PET is an outright gift to someone which is not covered by an exemption.

If you died within seven years of making a gift, the value of that gift will be included in your estate and will use up part or all of your available NRB before any other assets owned by you. This means that if the PET is less than the NRB there will be no tax to pay.

If tax is payable on a PET, it is worth noting that it is payable by the person who received the gift and can be less than 40% if you survived between three and seven years.

Chargeable Lifetime Transfers

If a gift is not exempt immediately or treated as a PET, it is a chargeable lifetime transfer (CLT).

CLTs are normally gifts made into certain types of trusts, rather than gifts made outright to individuals and the tax can depend on what other gifts you have made in the previous seven years.

CLTs can create an IHT liability during your lifetime, but may also be chargeable to further IHT when you die.

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ReliefsCertain reliefs allow you to pass on some assets free of any IHT liability. The main reliefs are:

Agricultural Relief

Agricultural relief can be hugely valuable, if you owned and occupied property that was used for agricultural purposes for two years before your death, or if you owned it for seven years and it was occupied by someone else. In these circumstances, the relief would be 100%.

Agricultural property is land or pasture that is used to grow crops or to rear animals intensively. It can also include farm buildings, farm cottages and farmhouses as well as stud farms for breeding and rearing horses and grazing. But it doesn’t include harvested crops or farm equipment and machinery.

Business Relief

Business relief provides relief from IHT on the transfer of relevant business assets at a rate of 50% or 100%. You must have owned the business or asset for at least two years before your death.

A business, or interest in a business, and shares in an unlisted company, will get 100% business relief. Whereas the estate will only be entitled to 50% business relief on:

• Shares controlling more than 50% of the voting rights in a listed company,

• Land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled, or

• Land, buildings or machinery used in the business and held in a trust that it has the right to benefit from.

Paying the IHT liabilityThe IHT liability on your estate is payable by your personal representatives (PRs). It must be paid within six months of the end of the month of your death. Before paying any IHT, the PRs need to obtain an IHT reference number from HM Revenue & Customs (HMRC). The reference number, which can be applied for online via HMRC’s website, or by post using form IHT422, needs to be obtained at least three weeks before a payment is made.

In some cases, such as where your estate consists of items that may take time to sell, like a house, it is possible to arrange to pay the IHT in instalments over a period of up to 10 years.

Remember it is not possible to take money out of the estate, except for funeral expenses, until probate is obtained. This is the legal document that proves that the PRs can distribute your assets to your beneficiaries.

Probate is not granted until all duties and taxes, including IHT, have been paid or a payment plan agreed. It may be that there are insufficient funds available in the estate to pay the IHT and PRs may have to pay the IHT from their own bank account. If a PR pays it from their own bank account, they can claim the money back from your estate, or the beneficiaries, once probate has been obtained. Banks, building societies and insurance companies will sometimes release money direct to HMRC when IHT is payable, so it may be worth the PRs approaching them if sufficient funds are held in cash or investments.

Where tax is due on a failed PET, it is the person who received the gift that must pay the tax. However, they may be able to benefit from taper relief which reduces the amount of tax due if the gift was made between three and seven years before your death. If the person receiving the gift can’t or will not pay, the amount due then comes out of your estate.

This document is based on Canada Life’s understanding of applicable UK tax legislation and current HM Revenue & Custom’s practice, as at March 2020 and could be subject to change in the future. We recommend you consult with your professional adviser for more details about your individual tax position.

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Canada LifeThe Canada Life Assurance Company provides insurance and wealth management products and services through domestic operations in the UK, and international operations in the Republic of Ireland, the Isle of Man, Germany and, of course, Canada, as well as branch and subsidiary operations in other countries.

Canada Life is a subsidiary of The Great-West Life Assurance Company.

Strength and stabilityWe understand that you want to invest in a company that is strong, safe and secure. As part of the Great-West Lifeco group we are a constituent of the Financial Times Global 500 world’s largest companies. With combined assets under administration of more than £951 billion (as at 31 December 2019) we have a strong platform for continued growth as a world-class financial services provider.

Ratings are another reflection of our financial strength; Great-West and its subsidiaries have received strong scores from the major ratings agencies.

You can view our latest ratings on the ‘About us’ part of our website

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If you’d like a copy of our service charter, please ask your professional adviser for a copy.

About Canada Life

For more information please speak to your professional adviser.

Canada Life Limited, registered in England no. 973271. Registered office: Canada Life Place, Potters Bar, Hertfordshire EN6 5BA.Telephone: 0345 6060708 Fax: 01707 646088 www.canadalife.co.uk Member of the Association of British Insurers.

Canada Life International Limited, registered in the Isle of Man no. 33178. Registered office: Canada Life House, Isle of Man Business Park, Douglas, Isle of Man IM2 2QJ.Telephone: +44 (0) 1624 820200 Fax: +44 (0) 1624 820201 www.canadalifeint.com Member of the Association of International Life Offices.

Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.Canada Life International Limited is an Isle of Man registered company authorised and regulated by the Isle of Man Financial Services Authority.

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