Inheritance Tax In Trusts And Companies

Do I have to pay inheritance tax on transfers to trusts?

Generally, if you make a transfer to a trust the gift will be called a potentially exempt transfer. So in most cases, provided you survive for seven years, you as donor won't have to pay any inheritance tax on that gift. If you die within seven years, then the gift may be counted as part of your estate and an inheritance tax liability computed on a sliding scale.

Which trusts are exempt from inheritance tax?

A narrow range of specialist trusts are exempt from inheritance tax. They include charitable trusts, trusts for vulnerable persons, heritage property trusts, and also employee benefit trusts.

What is the Ten Year inheritance tax charge on trusts?

Discretionary trusts allow individuals to settle property, for the benefit of others with trustees, and having great discretion as to how the property is dealt with. Those trusts may continue for many, many years. As a result, the government has imposed what is called a periodic charge on the value of the assets in the trust. So assets coming out of the trust may be the subject to tax. If there have been no asset transfers out of the trust, then every ten years, an inheritance tax liability is computed at a reduced rate by reference to the value of the trust at the ten year anniversary.

Do I have to pay inheritance tax on transfers to companies?

Generally if you're dealing with a company, anything that passes between you and the company will be part of a commercial deal, so inheritance tax won't apply. Occasionally, you may do a deal with a company and you realize that the wrong price was applied. There's something in the inheritance tax code about bad bargain exemption, providing you're dealing with arms length terms. An unintended inheritance tax liability shouldn't arise.

I am the executor, how do I calculate the value of the deceased's estate?

If you find that you're the executor, you will deal in England and Wales with the probate service, and also with HM revenue and customs. They will take you through a lengthy process which involves not only the grant of probate with representation or equivalency in Scotland, Wales and Northern Ireland but also they will send you a great pack of papers which includes the inheritance tax return from IHT 205 and supporting notes. Now, it's quite possible for an individual dealing with a simple estate to go through the whole process without having to take professional advice. If an individual doing that does have any doubt, they should seek professional advice from a solicitor or a qualified estate practitioner. The paperwork is rather like an income tax return that there is a return form with lots of schedules and detailed guidance notes and the box numbers cross-refer, so there is a step-by-step process to take you through the calculation of the value of the estate. Then you make the tax payable, and finally, the dates on which the taxes are actually due.

What is a form IHT205?

The form IHT205 is the basic estate return. It is the form which most executors will deal with if there's tax to pay. It helps them work out all the assets in the estate, dividing them up into various categories, and then goes on to help calculate the inheritance tax liability itself.

What is a form PA1?

The PA1 form is the basic document which starts the probate process. The probate application is the form which is used by the Probate Service in England and Wales to start the process of having the named executor in the will recognized for legal purposes. There are equivalents in Scotland and Northern Ireland.

I am the executor, where can I get advice on paying inheritance tax?

HM Revenue and Customs have taken quite a lot of care with the guidance notes that they've produced that go with the various estate returns. They're very helpful. Many people who find that when they telephone the inheritance tax departments within HM Revenue and Customs, they're very helpful indeed to non-professional individuals who are acting as a representative in an estate. A lot of executors however find the whole process very daunting. They will have to come to grips with the financial affairs of a person whom they might have known as an individual very well, but have no idea about their assets and liabilities. They will have to account for tax, they will have to clear any bank borrowings, they will have to be accountable to the various official bodies that are the city administration of estates in the UK, and of course they will be accountable to the beneficiaries for the final distributions. They may feel that's too much. Then it's possible to instruct a professional adviser, a member of the Society of Trust and Estate Practitioners, a lawyer, an accountant, to help with the process.

I am the executor, how does paying inheritance tax differ in Scotland and Northern Ireland?

The mechanisms for paying tax in England and Wales, in Scotland and in Northern Ireland are exactly the same. The processes by which these states is administered are slightly different in each of the countries because of the historic background across the whole of the UK.