Published On: Sun, Oct 8th, 2023

Inheritance tax warning over ‘misleading’ form after person overpays by £30,000 | Personal Finance | Finance

A solicitor has warned about a “really misleading” form that could lead to Britons overpaying by thousands of pounds.

Jessica Partridge, a partner specialising in private client law at Mayo Wynne Baxter, told the IHT436 form is “really misleading” after a client misunderstood the rules and overpaid by £30,000.

The form has to be filled in to transfer a residence nil rate band (RNRB), often from one spouse to another when the second one dies.

The RNRB is an additional tax-exempt allowance as it includes a property that was the main residence of the deceased.

The residence nil rate band was brought into law from 2018 when it was £100,000 – it has increased since then to the current £175,000.

Guidance notes in the form state: “Where the spouse or civil partner’s death occurred before 6 April 2017, the Residential Enhancement at that time is deemed to have been £100,000.”

The client who overpaid was dealing with an estate where one partner had died before 2017 and so they assumed their allowance was £100,000 while the other died recently, with the second partner having the current allowance of £175,000.

In fact, the way the rules work is when the second partner dies, it’s the unused percentage of the first partner’s allowance that can be transferred over, rather than the amount, and then this percentage applied at the current nil rate band rates.

In this case, as the first death was prior to 2017, the full 100 percent of the nil rate could be transferred, providing an additional £175,000 tax-exempt allowance, rather than £100,000.

As the person needlessly paid the 40 percent tax on £75,000 of the estate, they overpaid by £30,000.

The solicitors is now doing a correct account to get the tax repaid. Ms Partridge said there are other aspects of the inheritance tax rules that make it hard to understand for lay people.

She said: “Inheritance tax is a really complex tax. There’s lots of different aspects, people have varying assets.

“There’s rules for giving money away if it’s capital, or if it’s income, for giving something away and retaining a benefit, for business property relief, for agricultural property relief, for heritage property.

“There’s so many different aspects of a person’s estate and no one is the same. In order to navigate all the potential tax exemptions and benefits, you have to have a really good knowledge.”

Inheritance tax has to be paid to within six months of the death of the person.

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