HM Revenue and Customs has announced an increase to 3% of the interest charge on all late payments of Inheritance Tax, effective from September 2009.
The charge will apply to any Inheritance Tax not settled within the statutory six month period from the death of the owner of the estate. Previously, since March 2009, interest due on late payments of Inheritance Tax had fallen to nil.
HMRC has stated that the ‘Interest is not a penalty, but compensation for tax paid late.’  The increased interest charge will be complemented by an interest payment of not less than 0.5%, given as a refund to those who pay more Inheritance Tax than they should.
Where it does apply, Inheritance Tax is levied on all eligible monies at a flat rate of 40%.
For purposes of Inheritance Tax planning, an individual has a tax-free allowance, i.e. a threshold that must be reached before Inheritance Tax becomes payable. This is known as the ‘nil rate band’, and for an individual is pegged at £325,000 for 2009/10, rising to £350,000 for 2010/11. Spouses are taxed separately for Inheritance Tax, so that a couple has a joint allowance of £650,000.
Inheritance Tax is paid on the value of an individual’s ‘estate’, which includes much more than just the value of his or her home. It includes all properties, assets, investments, savings, and insurances that pay out upon their death. These are then reduced by the settlement of any debts and liabilities, to give the net value of the estate.
Where the estate’s worth exceeds the nil rate band of £325,000, Inheritance Tax applies at 40%.
The good news is that Inheritance Tax has been called ‘the most avoidable tax of all’, and with a little estate planning and good financial advice, it can be significantly reduced, or avoided altogether.
To use a simple example: a widow owns property worth £200,000 and savings and investments worth another £50,000. She also has life insurances written in favour of her children, worth a further £300,000. Upon her death, her total wealth is therefore £550,000. This is reduced by debts of £25,000 so that the net value of her estate is £525,000. Her Inheritance Tax allowance is £325,000, which leaves £200,000 subject to Inheritance Tax allowance at 40%. The Inheritance Tax bill payable by her children is therefore £80,000.
The tax bill in this example was entirely avoidable.
A good financial adviser would have set the life insurance up ‘in trust’, which would have meant it would not have counted towards the value of her estate. This would have reduced the net value of her estate (after payment of her debts) to £225,000 – well within her tax allowance, so no Inheritance Tax to pay. This is only one of several Inheritance Tax exemptions, which offer opportunities to reduce or avoid Inheritance Tax.
