HMRC Inheritance Tax: Customer Guide

Tell me about calculating the IHT

• How do I work out whether there is any Inheritance Tax due on an estate?
• How do I divide the tax between the Instalment Option Property (IOP) and Non-Instalment Option Property (NIOP)?
• The deceased had an interest in a trust, how do I work out who pays what tax?
• How do I calculate the Inheritance Tax when there have been lifetime gifts?
• Tell me how to calculate successive charges relief
• How do I work out double taxation relief?
• How do I calculate the tax on a lifetime transfer when there is fall in value relief and taper relief?
• How do I work out the chargeable estate where there are specific gifts free of tax and the residue is partly exempt? (grossing up)
• How do I work out the chargeable estate where there are specific gifts free of tax and the residue is partly exempt and there are assets which qualify for agricultural or business relief? (interaction and grossing up)

How do I work out whether there is any Inheritance Tax due on an estate?

See an example calculation of Inheritance Tax

How do I divide the tax between the Instalment Option Property (IOP) and Non-Instalment Option Property (NIOP)?

You will need to calculate the total tax due and then apportion the tax between the NIOP and the IOP.

Example 1

The deceased died on 3 March 2005.

NIOP (bank account, chattels shares etc)	£101,050
Less liabilities (gas bill)	£50
Less funeral expenses	£1,000
Net IOP	£100,000
Instalment option property (house)	£300,000
Aggregate chargeable transfer	£400,000
Less Inheritance Tax threshold	£263,000
Total liable to Inheritance Tax	£137,000

£137,000 @40% = £54,800 total Inheritance Tax due

You can now calculate the portion of tax which is due on the NIOP:

• NIOP ÷ aggregate chargeable transfer x total Inheritance Tax due = tax due on the NIOP
• 100,000 ÷ 400,00 x £54,800 = £13,700 NIOP tax

Similarly, the tax due on the IOP is calculated:

• 300,000 ÷ 400,000 x £54,800 = £41,100

(Check that the tax on the NIOP + the tax on the IOP = the total tax due £13,700 + £41,100 = £54,800)

Each instalment is 1/10 of the total tax due on the IOP, so the first instalment will be:

• £41,100 ÷ 10 = £4,110

Find out more about instalments in the guide Paying Inheritance Tax in yearly instalments.

The deceased had an interest in a trust, how do I work out who pays what tax?

If the deceased had a life interest in a trust as well as a personal estate, the tax due on the trust property is paid by the trustees of the trust and the tax due on the personal estate is paid by the personal representatives.

This means that the tax has to be apportioned between the personal estate and the trust.

Example 2

Mr Lloyd died on 9 April 2005. As well as his personal estate he had a life interest in a trust set up under his late wife's will.

Deceased's net estate	£254,678
Mrs J Lloyd Will Trust net value	£123,450
Aggregate chargeable transfer	£378,128
Less Inheritance Tax threshold	£275,000
Total liable to Inheritance Tax	£103,128

£103,128 @ 40% = £41,251.20 total Inheritance Tax due

You can now calculate the portion of tax which is payable by the executors and the portion which is payable by the trustees of the Mrs J Lloyd Will Trust.

• deceased's net estate ÷ aggregate chargeable transfer x total Inheritance Tax due = tax payable by the executors
• £254,678 ÷ £378,128 x 41,251.20 = £27,783.64
• net value of Mrs J Lloyd Will Trust ÷ aggregate chargeable transfer x total Inheritance Tax due = tax payable by trustees
• £123,450 ÷ £378,128 x £41,251.20 = £13,467.56

Both the deceased's estate and the will trust could consist of NIOP and IOP and the total tax due would be apportioned in four ways.

Example 3

The facts are as in example 2 above, but the deceased's net estate is divided into NIOP and IOP and the Mrs J Lloyd Will Trust also contains both NIOP and IOP.

Deceased's net estate IOP	£240,000
Deceased's net estate NIOP	£14,678
Mrs J Lloyd Will Trust IOP	£120,000
Mrs J Lloyd Will Trust NIOP	£3,450
Aggregate chargeable transfer	£378,128
Less Inheritance Tax threshold	£275,000
Total liable to Inheritance Tax	£103,128

£103,128 @ 40% = £41,251.20 total Inheritance Tax due

You can now calculate the portion of tax which is payable by the executors on both the IOP and the NIOP, and the portion which is payable by the trustees of the Mrs J Lloyd Will Trust on the IOP and the NIOP using the same method of apportionment as in the previous two examples.

• deceased's net estate IOP ÷ aggregate chargeable transfer x total IHT due = IOP tax payable by the executors
• £240,000 ÷ £378,128 x £41,251.20 = £26,182.37
  1st instalment = £2,618.23
• deceased's net estate NIOP ÷ aggregate chargeable transfer x total Inheritance Tax due = NIOP tax payable by the executors
• £14,678 ÷ £378,128 x £41,251.20 = £1,601.27
• Mrs J Lloyd Will Trust IOP ÷ aggregate chargeable transfer x total Inheritance Tax due = IOP tax payable by the trustees
• £120,000 ÷ £378,128 x £41,251.20 = £13,091.18
  1st instalment = £1,309.19
• Mrs J Lloyd Will Trust NIOP ÷ aggregate chargeable transfer x total Inheritance Tax due = NIOP tax payable by the trustees
• £3,450 ÷ £378,128 x £41,251.20 = £376.38

How do I calculate the Inheritance Tax when there have been lifetime gifts?

You should follow the guidance in How will Inheritance Tax on gifts be worked out when I die to find out how to calculate the tax payable when there have been gifts.