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Who is liable to actually pay Inheritance Tax if it is due?

Posted on Thursday, 15th October 2015 by

It is widely known that each person has a “nil rate band” allowance for inheritance tax, but it is not quite as simple as you may think to determine who actually has to pay the tax due.  It is possible to state in the Will who is to be liable for the IHT attached to specific assets (and this is strongly advisable if there is any prospect of the estate being liable for tax), but there are a huge number of Wills that are silent on the point.

working out inheritance tax

 

 

 

 

 

Under various legal provisions, the following four classes of person may be liable for the IHT due when a person dies:

 

  1. The Personal Representative (the Executor), who is liable for IHT on the “free estate”. The free estate includes assets which:
    • pass to the PR according to the terms of the will or the intestacy rules
    • the deceased was beneficially entitled to during his lifetime but which pass to others automatically on the deceased’s death, such as joint property passing by survivorship, nominated assets and any gift made by the deceased which is conditional on his death

This liability is limited to the amounts that the PR administers, and in practice means that an Executor should be very diligent in ensuring that the estate is fully administered before making distributions to beneficiaries.

  1. The trustees of trusts in which the deceased had a qualifying Interest In Possession (IIP) are liable for the IHT which is attributable to the value of the deceased’s interest. The trustees’ liability is limited to:
    • the value of assets they have received or disposed of or that they are liable to account for to the beneficiaries; and
    • any other assets they are holding as trustees to pay tax or that might have been available to pay tax, if they had not been neglectful or failed in their duty as trustees.
  1. A person in whom the asset vests (for example, a beneficiary under a will or the intestacy rules) or who is entitled to an IIP. In principle, that person and the PR are both liable for the IHT attributable to the assets passing to him. The liability is limited to the value of the asset. In the case of an IIP, although the beneficiary’s entitlement is to the income only, the liability is limited in relation to the capital value of the assets in which he has an IIP – this is why it is necessary for the Trustee to be liable as well, so as to ensure that the IHT may be borne from the Trust assets.
  1. An individual who has benefited from assets transferred to a trust before the deceased died or income from those trust assets (for example, a beneficiary of a discretionary trust) is liable for the IHT attributable to those trust assets. Liability is limited to what the beneficiary received less any related income tax paid by him.

There is a further category that often catches people unawares.  Liability for IHT on any gift made by the deceased during the seven year period up to his death rests with the person receiving the gift. This can mean that if you receive a gift from a person and they then die within 7 years, HMRC could come back to the recipient to claw back IHT.

Refusing to pay the IHT

 

Having worked out who is liable for the tax, the typical question is what happens if these people refuse to pay the IHT?  The PR or Executor becomes liable if no one else comes within the categories of liability for the tax or it is unpaid 12 months after the end of the month in which the person died.  As above, the PR’s liability is limited to the value of the assets which he received or would have received but for his own neglect or default. There is no statutory right of recovery against the recipient of a lifetime gift.

In a nutshell, whilst there are several people who may be liable for inheritance tax, in practice this will always apply to the Executors or Personal Representatives, either from the outset or in the event that another person fails to pay their liability.

Named as an Executor

 

If you are named as an Executor under a Will, you should be aware that you can end up being personally liable for tax on it.  Please speak with one of our probate team if you are in need of any assistance.  We work with Executors from the outset, or can still help if you have started to deal with an estate but are finding it to be more difficult or time consuming than you expected.

If you found this article helpful we would recommend reading, ‘Inheritance Tax and the Family Home‘.

Talk to our legal team

The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our lawyers who will be happy and able to advise you on your own particular circumstances.

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Leanne Hathaway - Tax and Trusts
Leanne Hathaway - Tax and Trusts
leanne.h@ehlsolicitors.co.uk 01455 274 170
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