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Tax Essentials: Direct Taxes 2005-06 by Mark McLaughlin CTA (Fellow) ATT TEP and Sarah Laing CTA

Mark McLaughlin CTA (Fellow) ATT TEP and Sarah Laing CTA consider the question of liability to IHT and outline the normal payment dates.

Due dates

For the normal due dates for payment of IHT, see below. The differing time limits for paying IHT and delivering accounts is such that the tax will often become payable before accounts are due to be delivered. In addition, the personal representatives of a deceased's estate must pay any IHT due at the time of applying for probate.

Who is liable to IHT?

Chargeable lifetime transfers - The transferor is primarily liable to IHT in respect of chargeable lifetime transfers. However, if IHT remains unpaid beyond the due date, it can become the liability of the following:

• the transferee;
• any person in whom the property is vested;
• any person who becomes beneficially entitled to an interest in possession of the property; or
• the beneficiary of a settlement (where the property was transferred to it) for whose benefit the property or its income is applied.

The above are also liable for additional IHT on chargeable transfers, in the event of the transferor’s death within 7 years of making them. However, the deceased’s personal representatives may become liable to the extent that the tax remains unpaid.

Potentially exempt transfers (PETs)

The IHT liability on PETs becoming chargeable upon the death of the transferor within 7 years is that of the transferee(s) and/or the deceased’s personal representatives, as in lifetime transfers above.

Transfers on death

The persons liable in respect of transfers on death are:

• the deceased’s personal representatives (generally in respect of property which was not settled before death);
• the trustees of a settlement (in respect of property settled before death);
• any person who becomes beneficially entitled to an interest in possession of the property;
• the beneficiary of a settlement (where the property was included in it at death) for whose benefit the property or its income is applied;

The IHT Direct Payment Scheme enables the personal representatives to draw on money held in the deceased’s bank or building society accounts to pay the IHT due on delivery of form IHT200.

Settled property

The trustees are primarily liable for the IHT in respect of certain chargeable occasions involving settled property. Where the tax remains unpaid, it can generally become the liability of:

• any beneficiaries with an interest in possession in the property;
• any person for whose benefit the settled property or its income is applied following the transfer;
• the settlor, if alive when the transfer was made and the trustees are not UK resident.

Payment by instalments

IHT may be paid by 10 equal yearly instalments on chargeable transfers of qualifying assets, in respect of the following:

• transfers made on death;
• chargeable lifetime transfers where the IHT is borne by the transferee;
• settled property remaining in the settlement;
• PETs becoming chargeable (but only where the transferee still holds qualifying property upon the transferor’s death).

For these purposes, ‘qualifying assets’ include:

(a) land of any description, wherever situated;
(b) controlling shareholdings;
(c) unquoted shares (and in certain cases securities), broadly where the deceased did not have a controlling interest immediately before death and:
• the tax cannot be paid without undue hardship; or
• their value exceeds £20,000, and the holding is at least 10%; or
• for transfers on death, the tax payable on those shares and securities, together with other instalment assets, amounts to 20% or more of the tax payable by that same person.
(d) a business or an interest in a business;
(e) woodlands.

The first instalment is payable on the normal due date for the whole tax, if it were not payable by instalments.

Interest is charged on instalments paid late. However, in certain cases (eg land which does not form part of a business, land not attracting agricultural property relief, or shares in an investment company), interest is charged on the total tax outstanding, and is added to each instalment.

If the Instalment property is sold, the outstanding tax becomes payable Immediately.

Due dates for payment

Lifetime transfers (other than additional liability on death)
• tax is usually due 6 months after the end of the month in which the transfer takes place.
• tax due on a chargeable lifetime transfer made after 5 April and before 1 October in any year is due at the end of April in the following year.
• tax may be payable before accounts are due to be rendered.

Exceptions

• tax chargeable on the ending of conditional exemption for works of art, historic buildings etc, on woodlands and on maintenance funds for historic buildings is always payable 6 months after the end of the month in which the chargeable event occurs.

Transfers on death

• tax is due 6 months after the end of the month in which death occurred.
•personal representatives must pay the tax for which they are liable on delivery of their account (even if before the due date).
•at the same time they may pay any other tax on the death at the request of the persons liable.

Lifetime transfers — additional liability on death

Where tax or additional tax is due at death because:

• a potentially exempt transfer proves to be a chargeable transfer; or
• the transferor dies within 7 years of making a chargeable lifetime transfer; or
• the settlor dies within 7 years of the transfer and a further liability arises under the rules relating to settlements without interests in possession, the additional tax is due 6 months after the end of the month in which death occurs.

June 2005

Mark McLaughlin CTA (Fellow) ATT TEP is a tax consultant and Editor of TaxationWeb. Sarah Laing CTA of CPE Consulting is an author.

The above article is adapted from ‘Tax Essentials – Direct Taxes 2005-06’ published by Tottel Publishing. To order Tax Essentials – Direct Taxes 2005-06, click here