Inheritance Tax | What should you be looking out for?

Frequently Asked Business Question:

I am the Executor of a distant relative’s estate.  He has died recently, and his wife predeceased him.  They had no children.  Although the Estate amounts to £1m I understand that with two nil rates bands and two residential nil rate bands there should be no inheritance tax payable by the estate?  The Estate consists of shares in the relative’s company, a house, and some investments.

Top Tip:

Unfortunately, the administration of your late relative’s Estate may not be as straightforward as it seems.  Many people incorrectly presume that as the nil rate and residential nil rate band amounting to £325k and £175k per person respectively which are transferable, the first £1m of a joint estate is Inheritance Tax (IHT) free.  This is not necessarily the case.  In the circumstances that you describe, the residential nil rate band will not be available because it is only available when a home is left to a direct descendent.  A direct descendent is defined as a child, grandchild, or other lineal descendent or a husband, wife, or civil partner of a lineal descendent.

The next matter to consider is whether the shares in the company owned by the deceased are exempt from IHT. This will only be the case if they qualify for Business Property Relief (BPR)  Broadly speaking,  the shares must be in a trading company and not a company that mainly deals in stocks, shares, land, and buildings, or the making or holding of investments.  Therefore, you will have to make enquiries about the nature of the company and complete a Schedule IHT413 and submit it along with the Inheritance Tax Form IHT400 to claim BPR. HMRC has a dedicated team that reviews BPR claims and a significant amount of these are challenged and often rejected.

You have also assumed that the Estate can benefit from a full unused nil-rate band from the deceased’s wife who predeceased him.  This may very well be the case however it will be necessary to prove to HMRC that the spouse who died earlier did not use any of their nil rate band. If she left part of her estate to anyone other than her surviving spouse or charity, she will invariably have used up some of her nil rate band.  To make this claim, it will be necessary to obtain a copy of the Will and Probate forms of the deceased wife and complete Form IHT402, enabling the Estate to claim any unused nil-rate band from the spouse.

The final element of the Estate is investments. You will need to obtain a schedule of these investments as some of them may be outside of the scope of Inheritance Tax and this would include pension investments that are written in trust.  There are also a number of tax-efficient investment products in respect of which the personal representatives can claim exemption from Inheritance Tax on and these would include BPR Schemes and investments in stocks and shares listed on the Alternative Investment Market (AIM).