PRIMARY AND SECONDARY RESPONSIBILITY FOR PAYMENT OF THE TAX

There are primary and secondary liabilities for the payment of inheritance tax. If the Revenue cannot, or chooses not to, extract the tax from the person primarily responsible for payment when it is overdue, the Revenue can obtain payment from the person who has the secondary liability for payment of the tax.

In cases where the tax is primarily the responsibility of the transferor there are secondary liabilities for payment upon the person to whom the asset is transferred (whether it is put in his name for his own benefit or the benefit of another) and upon anyone who benefits from it.

However, there are limits to a person’s liability to pay the tax which in essence come down to the principle that a person is only responsible for the tax to the extent that the relevant assets come into his hands or would have come into his hands but for his neglect or default. There is an exception to this rule, the exception being that on death all the inheritance tax due in respect of an asset can be recovered from anyone entitled to an interest in the asset as a result of the death, for example from a person entitled to only a part of the income produced by the asset.

If a person who has the secondary liability for the payment of the tax pays it or a person with no responsibility for the tax pays it, he can recover the tax from the person further up the ladder.

TAX ON IMMEDIATELY CHARGEABLE TRANSFERS

Inheritance tax payable on an immediately chargeable transfer is borne by the donor unless the donor and the donee agree otherwise and, if borne by the donor, the gift must be ‘grossed up’, that is to say, the gift is considered to be the sum given and the amount of the tax payable because that is the amount by which the donor’s estate is diminished.

ADDITIONAL TAX ON IMMEDIATELY CHARGEABLE GIFTS AND PETs WHEN THE DONOR DIES WITHIN SEVEN YEARS

Primary responsibility for payment of inheritance tax is usually that of the transferor but any tax which becomes payable on an immediately chargeable gift as the result of the death of the donor within seven years of the making of the gift is primarily the responsibility of the person to whom the gift is given or the person who receives a benefit from it, irrespective of who paid the tax which was originally payable. Similarly any additional inheritance tax payable on a PET by reason of death of the donor within seven years of the making of the gift is primarily the responsibility of the person to whom the gift is given or who receives a benefit from it. In these two cases, if the tax has not been paid to the Revenue within 12 months of the death, the Revenue can also recover it from the deceased’s personal representatives out of the estate.

TRUST FUNDS AND TRANSFERS OF VALUE

If trustees make a transfer of value, any inheritance tax payable is usually the responsibility of the trustees to be paid out of the trust funds, but if a transfer of value is the result of the death of a disabled person entitled to the income of a trust for the disabled for the duration of his life, the tax payable on the death is borne by the deceased’s personal representatives and the trustees in the proportion to the relative values of the deceased’s own estate and the trust funds. To work out the proportions, calculate an estate rate by dividing the total inheritance tax payable by the value of the total chargeable estate (the taxpayer’s own assets and the trust funds in which he had an interest) and multiply the resulting figure by 100. Then multiply the value of the taxpayer’s own assets by the estate rate to ascertain the tax payable by his estate and multiply the value of the trust funds by the estate rate to ascertain the amount of the tax to be borne by the trust.

TAX ON A RESIDUARY ESTATE BEQUEATHED TO BOTH EXEMPT BENEFICIARIES AND TAXABLE BENEFICIARIES

If a will leaves the residuary estate to exempt beneficiaries (such as a charity or a surviving spouse or civil partner) and to taxable beneficiaries, any inheritance tax which is payable on the estate must be paid out of the shares of the taxable beneficiaries after the estate has been divided but before it is distributed. By way of example, consider a will which gives a residuary estate of £500,000 before tax equally between the deceased’s son and his widow and in respect of which £90,000 tax is payable. Notwithstanding any provision in the will to the contrary as to how they shall bear the tax, the residuary estate must first be divided: £250,000 for the son and £250,000 for the widow and then the full £90,000 tax must be deducted from the son’s £250,000 before the estate is distributed so he will receive £160,000 and the widow £250,000. This is in spite of the fact that the wording of the will provided that they should inherit equally.

TAX ON OTHER BEQUESTS MADE BY WILL

With the exception of the last mentioned rule the wording of a will can determine who bears any inheritance tax on bequests made by the will. Unless the will states otherwise, tax is borne by those who inherit the residuary estate except in the case of joint or foreign property, in which cases the tax is payable by the beneficiary of the jointly owned or foreign property.

SUMMARY

•  On a PET (including a transfer of value into a trust for disabled beneficiaries) no tax is payable unless the donor dies within seven years, in which case it is payable by the donee and taper relief will be available if the donor survived the gift by three years or more.
•  On a lifetime immediately chargeable transfer (such as a transfer of value into a trust other than a trust for disabled beneficiaries or a transfer to a company) if the transfer causes the transferor’s nil-rate band to be exceeded:
  • a)The donor and the donee can agree who will bear the immediately chargeable tax but if it is borne by the donor the transfer will be treated as a gift of the sum given and of the relevant tax and the sum must be grossed up to ascertain the tax payable. The tax is payable at the lifetime rate which is one-half of the rate chargeable on death.
  • b)Any additional tax payable as a result of the donor dying within seven years of making the gift is the responsibility of and borne by the donee irrespective of who paid the immediately chargeable lifetime rate tax.
•  If trustees of a settlement make a transfer of value, any inheritance tax payable is the responsibility of the trustees to be paid out of the settled funds, unless the transfer of value is the result of the death of a person entitled to a present interest in a trust for the disabled, in which case the tax payable on the death is borne by the deceased’s personal representatives and the trustees in the proportion to the relative values of the deceased’s own estate and the trust funds. The tax is payable at the estate rate.
•  If a will leaves the residuary estate between exempt beneficiaries (such as charities, spouses or civil partners) and taxable beneficiaries, any inheritance tax which is payable on the estate must be paid out of the shares of the taxable beneficiaries after the estate has been divided but before it is distributed.
•  If a will does not state to the contrary, with the exceptions of jointly owned assets, foreign property and residuary estates bequeathed between exempt and taxable beneficiaries, inheritance tax is borne by the residuary estate.

WHEN IS INHERITANCE TAX DUE?

In the case of an immediately chargeable lifetime gift made between 6 April and 30 September inclusive, the inheritance tax is due on the 30 April in the following year and tax on immediately chargeable gifts made between 1 October and 5 April becomes payable six months after the end of the month in which the gift was made.

If additional tax becomes payable in respect of an immediately chargeable gift or inheritance tax becomes payable as a result of the donor of a PET dying within seven years of the gift, the tax is payable six months after the end of the month in which the donor dies.

All other inheritance tax payable as the result of death is payable on the earlier of the delivery of the account of the deceased’s estate to the Revenue by the personal representative, or six months from the end of the month in which the death took place, whichever is earlier.

CAN INHERITANCE TAX BE PAID BY INSTALMENTS?

In respect of the following assets the tax can be paid by ten equal annual instalments if the transfer occurs on death, the first instalment becoming payable six months after the end of the month in which death occurred.

• land and buildings
• timber
• the net value of a business or an interest in a business as an entirety as contrasted with individual assets of the business
• controlling shareholdings in a company whether or not it is a quoted company
• holdings of unquoted shares whose minimum value is at least £20,000 and which represent at least 10% of the company’s issued share capital or, if they are ordinary shares, 10% of the company’s issued ordinary share capital
• holdings of unquoted shares in respect of which the tax cannot be paid in a single payment without undue hardship
• holdings of unquoted shares, if the tax on them and other assets for which payment by instalments is permissible exceeds 20% of the tax payable by one person in the same capacity.

If the tax is payable by the donee in respect of a PET of the above types of assets, the option to pay by instalments can also be claimed, but only if the assets are still owned by the donee at the date of the donor’s death or the donee’s earlier death and if they are unquoted securities they must also have remained unquoted throughout the entire period between the original transfer and the death.

When the asset is sold, or in the case of a trust asset it ceases to be held on trust, the instalment option ends and any unpaid tax becomes immediately payable.

INTEREST ON INHERITANCE TAX

Interest at a daily rate is charged on unpaid inheritance tax from the date it becomes due. In the cases of buildings and land which do not qualify for agricultural relief and shares in an investment or property company, interest is charged on the full amount of tax outstanding but in the cases of the other assets which have the benefit of the instalment option interest is only charged if the instalment is overdue. The present rate of interest is 5% per annum.

CALCULATING INHERITANCE TAX – A BRIEF SUMMARY

To calculate the inheritance tax payable on a non-exempt lifetime gift, deduct the balance of the tax threshold which remains unused by previous non-exempt gifts from the net value of the gift and apply the full tax rate to obtain the figure for the tax. Then apply taper relief to the resulting figure. Tax is only payable on lifetime gifts if the total of the chargeable gifts themselves exceeds the tax threshold, in which case apply taper relief to the tax, not to the value of the gift.

To calculate the inheritance tax payable on a death estate, add the total of the net death estate to the total of the chargeable lifetime gifts and deduct any unused balance of the tax threshold. Apply the full tax rate to the resultant figure and then deduct the full tax payable on the lifetime gifts (calculated as above before the application of taper relief).