Most people learn about inheritance, assets and probate once they are required to manage the estate of a deceased close family member. Through this blog post, we will not only explain how and when IHT206 is used but also details regarding other relevant forms, their application and usage and a discussion on inheritance tax with some important points regarding deprivation of assets.
Why Do I Need To Use IHT206?
The IHT206 is a detailed set of notes related to inheritance tax which is used as part of the probate process of the excepted estate (where inheritance tax is not applicable) of a deceased UK resident. It is used along with form IHT205 to state details of the estate of the deceased owner.
The form IHT206 (2011) is only applicable under the following conditions:
- You are filling to submit the IHT205(2011), ‘Return of estate information’ form
- The deceased died between 6 April 2011 and 31 December 2021
In case of the death occurring before 6 April 2011, previous versions of the form will need to be referred to.
The purpose of the IHT206 is to provide detailed guidance about inheritance, probates, values of assets as well as for instructions on how to fill the IHT205 or any other necessary forms related to the estate of a deceased owner.
Additionally, if you need to claim to transfer any unused nil rate band (RNRB) against the Inheritance Tax form IHT436 will be used.
The IHT436 can only be used in conditions where:
- The spouse or civil partner of the deceased died before them
- Death of the spouse or civil partner took place before 6 April 2017
- If the death of the spouse or civil partner took place on or after 6 April 2017 without having used all of the RNRB available to them
Additionally, you will also need to fill out the IHT435 form. RNRB can also be applied in cases where the deceased either downsized to a less valuable residence, sold or gave away a residence on or after 8 July 2015.
The law that applies in his case is that if someone dies and their estate is valued at more than the basic Inehrtience Tax, the estate can qualify for a nil rate tax band on Inheritance Tax due on it.
Unlike basic Inheritance Tax, the RNRB does not apply to gifts and lifetime transfers such as transfers to trusts.
Can I Gift 100k To My Son To Avoid Inheritance Tax?
While, you can gift £100,000 to your son, any other family member or even to trust; however, there are conditions under which inheritance tax will be applicable.
The annual amount of tax-free gift money in the UK is £3,000. This means if you gift this sum of money to your family members (usually children and grandchildren) there will be no inheritance tax due on it.
In case of a monetary gift that sums to £100,000, out of this the amount of £3,000 will be considered as a tax-free gift allowance while the remaining £97,000 will be classified as a potentially exempt transfer.
However, should the person who has gifted this amount dies within a period of 7 years after transferring the amount, it will be counted towards their estate to calculate the amount of inheritance tax. The beneficiaries will not be expected to return the amount as it will only be considered for assessment purposes.
Gifts between partners or spouses are tax-free and will not be counted towards inheritance tax as long as they are permanent residents in the UK and are legally married or in a civil partnership. Additionally, donations made to charities, trusts and national organisations are also tax-free.
What Counts As Gifts?
The following items are counted as gifts and will not be counted towards one’s estate as long as deprivation of assets cannot be proved:
- properties including a house, land or buildings
- household and personal goods; such as furniture, jewellery or antiques
- stocks and shares
- unlisted shares (held for less than 2 years before the death of the gifting party)
If someone chooses to sell a valuable asset at a reduced value, the difference in the selling price versus the market value of that asset will be considered as a gift.
Inheritance tax due on gifts worth up to £325,000 is not taken from the beneficiary but accounted for in the deceased’s estate; unless the gifting party passes away within 7 years of transferring the gift.
What Is Inheritance Tax?
Inheritance Tax is a tax that is levied on the estate of someone who has passed away and left behind property, money and possessions that need to be “managed” in an appropriate manner so that (a) if there is a will made by the deceased, the instructions are followed or (b) in the case that there is no will of the deceased, the estate is appropriately handed over to the legal heirs.
The standard rate of Inheritance Tax is 40 per cent on an estate valued at or more than £325,000.
Even though there is no inheritance tax levied on an estate that is valued below £325,000; however, you may still be required to report the property to HMRC. Similarly, if valuables above the £325,000 threshold are left behind in the name of one’s partner or spouse, a charity or a community club, there will be no inheritance tax levied.
If the same property is left behind for children, the threshold will increase to £500,000.
What Counts As Deprivation Of Assets?
When someone deliberately reduces their assets to avoid having to pay fees and taxes, it is considered as “Deprivation of Assets”.
While most individuals consider that transfer of savings, selling of one’s property or gifting their home to a family member is all that counts as deprivation of assets, that is not all. Any of the following actions can be counted as deprivation of assets (unless there is evidence to prove otherwise):
- To give away a large sum of money
- To transfer the title deed of one’s property
- To spend a large amount of money which is in contrast with the spender’s usual spending pattern
- To lose money through gambling
- To use savings in order to purchase items excluded from a means-test such as a car or jewellery
What Is The 7 Year Rule Regarding Deprivation Of Assets?
The 7-year rule states that if someone has gifted their property or a part of it, no inheritance will be applicable to it after a lapse of 7 years.
Certain individuals choose to give their property to their children in order to avoid its inclusion in their financial assessment for care home fees contribution. However, depending on the usual spending patterns, financial considerations, health records and proof of intentions local council authorities can consider this as deprivation of assets.
Another option is to transfer your assets to a trust rather than an individual. In this case, there will be a group of individuals considered as a trust to whom the property’s ownership is entrusted with.
What Is Not Considered As Deprivation Of Assets?
According to the Guidance manual on assessment of capital, if the claimant has sold or transferred assets with the intention to:
- reduce or return the debt that they owe (either to an individual, bank or the state),
- make credit cards payments,
- pay for their mortgage,
- make payments for day to day expenses,
- improve their quality of life (for e.g by purchasing a new car or rebuilding a kitchen),
- improve their quality of health through medical expenses, or
- go on a holiday
it will not be considered as deprivation of assets.
Yes, deprivation of assets is considered a criminal offence simply due to the deliberate reduction of assets by claimants of benefits, especially those who are about to apply for care home residency.
However, in order to prove that a deliberate reduction of assets has taken place, there needs to be evidence supporting the below essential actions for deprivation of assets to be applicable:
- The applicant knew at the time of the said reduction of assets that they will be in need of care home residency shortly
- There appears to be no other motivation or intention for reduction of assets that may be proven with supportive evidence
The IHT206 is a set of detailed notes to guide individuals who need to fill in a form IHT205 and learn about key information related to the estate of a deceased close member of the family. However, this is not the only piece of information that will be needed; for instance, one should know that the annual gift allowance is £3,000 and giving away large sums of money prior to one’s death with the aim of avoiding inheritance tax might be considered a deprivation of assets. While it may be best to seek the advice of a financial/legal consultant, one must always make sure that they state the facts while submitting forms to HMRC as deliberate attempts to hide facts can have dire consequences.
FAQs: Why Do I Need To Use Form IHT206?
Do I need to complete Inheritance Tax form?
Yes, you need to complete an Inheritance Tax form to either pay the due amount of tax or declare that none is applicable before you can get a grant on the estate of a deceased immediate family member.
When should I use IHT205?
Form IHT205 is issued as part of the probate process when the estate of a deceased owner is an excepted estate. This means that there is no inheritance tax due on the estate.
Do you send IHT205 to HMRC?
Yes, once you fill in the IHT205, you will be sending it to HMRC. You can either fill out the form online or take a printout and fill the form in ink. You will find the IHT206 helpful when filling the IHT205.
How do I avoid Inheritance Tax on my property?
To avoid having to pay inheritance tax on your property, you can either keep it below the £325,000 threshold, give away some of the money or donate a portion to charity.
Do I have to declare inheritance to HMRC?
Yes, you must declare your inheritance to HMRC; whether or not there is any amount of tax due on it. Failure to hide information in case of taxable inheritance will not only lead to recovery of tax dues but also a penalty.