Can you reduce your IHT liability after you’ve died?!
Well, sort of…
The matter may be out of your hands, but your personal representatives (PRs) and beneficiaries can potentially save tax if they take good advice.
The IHT due on your assets after you’ve died is reportable and payable by your PRs (your executors or administrators). However, it’s your beneficiaries who will ultimately bear the costs of this (usually the residuary beneficiaries). So, less IHT for HMRC is good news for your loved ones.
In essence, your IHT bill can be mitigated by some prudent steps taken by your PRs and/or beneficiaries.
What do the PRs need to be on the lookout for?
There are some legislative provisions which can reduce the death IHT bill in certain circumstances.
Selling land and shares at a loss
Where land is sold at a loss within four years after death, the PRs can make a claim to reduce the probate value for IHT purposes (IHTA 1984, s 191). All sales within three years after death must be included, even those that give rise to a gain. This means that where there is an aggregate loss, the claim (made on form IHT38) is worth making, and should result in an IHT refund.
There is a similar provision in section 179 that applies to shares sold at a loss, this time within 12 months. Again, all sales must be included – form IHT35 has been designed for this purpose.
Ending Will trusts
It is not unusual for Wills to contain express trusts, and one of the most common is the discretionary trust (we’ll look at why testators might set these up in a later article).
There is a useful provision (IHTA 1984, s 144) which creates retrospective treatment for transfers out of trusts in certain circumstances. If assets are taken out of a Will trust within two years of death (subject to some other conditions), the transfer is treated as if it were made by the deceased.
This could reduce the death IHT bill where, for example, assets in a discretionary Will trust are distributed to the spouse or civil partner of the deceased, or a charity.
But remember, tax is just one factor in these decisions so be sure to take specialist advice before taking any steps.
What can beneficiaries do to save inheritance tax?
Beneficiaries can put a document in place which takes advantage of section 142 to redirect their inheritance. This is commonly known as a ‘deed of variation’.
There’s plenty that beneficiaries can do to reduce IHT by using a deed of variation. Here is just a very brief snapshot:
- Redirecting assets from a chargeable to an exempt beneficiary;
- Where two spouses or civil partners die in quick succession, the beneficiaries may be able to vary the estate of the first to die. This could help to secure the residence nil rate band (if the first estate is over £2m);
- Where business property relief (BPR) or agricultural property relief (APR) is left to an exempt beneficiary (such as a spouse) this may waste the relief. It may be prudent to redirect these assets to chargeable beneficiaries (such as the children, or a trust);
- Increasing the amount going to a charity could attract the reduced 36% IHT rate for the whole estate. If the maths works, this can lead to less IHT and more cash for the beneficiaries.
The important thing to remember is that tax is only one factor when considering what options PRs and beneficiaries have and specialist advice should always be sought.
If you need help with probate in Winnersh, Wokingham, Finchampstead, Crowthorne, Reading, Henley or elsewhere in the Thames Valley please get in touch.
This article does not constitute legal advice and should not be relied upon as such. Please always seek legal advice that is specific to your individual circumstances.