Death, taxes – and complications

By Bob Wheatcroft, of Armstrong Watson

Last updated 09:31, Friday, 29 August 2008

Inheritance Tax is an unpopular tax, but, as most of the collection is done by accountants and solicitors, it is a cheap tax to run with growing receipts. I suspect that makes its abolition unlikely.

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Finding out: Many people do not know who wound up a parent’s estate if it happened many years ago. To avoid these problems in the future, look for the evidence now and keep it safe

The reason for the increase in the tax take has been the increase in the value of people’s homes. Even with the recent falls in house prices, a very large number of home owners fall within the Inheritance Tax net and will continue to do so.

The tax applies not only to houses, but to all assets including savings, investments, valuables and many insurance policies.

Even ‘tax free’ investments like ISAs are not free of Inheritance Tax.

The basic structure of the tax is relatively simple in theory. The value of your assets is added up. Certain bequests, eg to charities and normally those to spouses, are free of tax.

Tax is then charged (at 40 per cent) on the excess above the threshold.

It is a bit more complicated than that in practice of course.

Gifts made within seven years of death or where you are still enjoying the asset, are taken into account and there are special rules for trusts and certain types of asset.

The current threshold (nil rate band) is £312,000. This means that married couples should be entitled to a total of £624,000 between them.

This was made easier by the Chancellor last year when he made the threshold transferable on the first death of a married couple (or civil partnership). There was no change for single people.

This change applies to couples even where one of them has already died.

In other words, the estate of a widow who lost her husband some years ago would still be able to benefit from any unused proportion of his nil-rate band when she herself died, as long as her death was after the change last October.

In principle, there is no limit to this. Within days of the change I was telephoned about a widow whose husband had died as long ago as 1948! However, the rules are less beneficial when the death occurred before 1974.

It was announced that HM Revenue & Customs would adopt a ‘light touch’ to claims for this transfer of threshold. This was interpreted to mean they would not expect a claim to be backed up by too high a standard of evidence. After all, at the time of the first death in many cases there would have been little reason to keep the papers once the estate had been wound up.

However, in practice, HMRC is beginning to demand evidence which either is not there or is very difficult to find in some cases.

These difficulties are magnified after the second death.

Many people do not know who wound up a parent’s estate if it happened many years ago. The survivor may remember but, once they are gone, there is no way of finding out. If you want to avoid these problems in the future, look for the evidence now and keep it safe.

Don’t rely on the taxman giving you the benefit of the doubt.