Inheritance disputes and Inheritance Tax
Typically, estates are distributed according to the terms of the will or, if there is no will, under the rules of intestacy.
Certain situations may arise where specific individuals feel they have not been adequately provided for.
In such cases, they may be able to bring a claim against the estate under the Inheritance (Provision for Family and Dependants) Act 1975.
If a claim proves successful or a settlement is agreed, the tax analysis can vary depending on how the funds are provided.
- What is liable to IHT: IHT is charged on the value of the estate plus transfers made in the last seven years less any available reliefs and exemptions.
- What is the rate of IHT: 40%
- IHT relief available: Each individual has a Nil Rate Band of currently £325,000
- Estates value below the Nil Rate Band? Death estates with value below the Nil Rate Band are not chargeable to IHT, subject to previous transfers
- Spousal exemption: Assets passing to a spouse on death are exempt from IHT and do not utilise the Nil Rate Band
- Transferring Nil Rate Bands: Surviving spouses can inherit unused Nil Rate Bands from deceased spouse
- Total Nil Rate Band available on second death: A maximum of two Nil Rate Bands totalling £650,000 are available.
- What are potentially exempt transfers: Gift of money or assets during lifetime that will only be chargeable to IHT if you die within seven years of the gift, reduced rates of IHT are applied if the donor survives between three and seven years.
Court Order
For tax purposes, a Court Order is typically treated as if it had been stipulated by the deceased in their will, meaning the estate will bear the cost of any additional Inheritance Tax liabilities.
The tax implications can vary depending on whether the payment is made "free of tax" or if the payment itself incurs tax. It is advisable to seek guidance on how this affects the tax borne by the estate and the amount received.
If no IHT was initially due because of spousal exemptions, the deceased's nil rate band may still be available for use.
Out of Court Settlements
Settlements can be made out of court, but the executors must carefully consider who is actually making the settlement-and crucially, whom HMRC will regard as having made the settlement.
Other considerations
Although there may be no inheritance tax due if the value of the gift is within the deceased's nil rate band, if there is a surviving spouse, this will limit or completely restrict any transferable nil rate band to them. This could increase the IHT due on the surviving spouse’s death. Careful consideration is needed in this circumstance
While we have focused on inheritance tax, there may also be capital gains tax and stamp duty land tax considerations that need to be explored.
Taxation support for executors is often a cost borne by the estate and ensures that you have done your best to protect the position of the beneficiaries.
If you find yourself in this difficult situation and have any questions or need further assistance, please get in touch with Natalie Butt.
