The death of his late Royal Highness Prince Philip, Duke of Edinburgh, has prompted some discussion in media circles about the payment of inheritance tax on death, with special reference to rules affecting the Royal Family.
In 1993, Her Majesty’s Government recognised that in the unique circumstances of an hereditary monarchy, special arrangements were needed for inheritance tax. The agreement reached with Her Majesty The Queen at the time provides that inheritance tax should apply to all bequests or gifts by the sovereign other than transfers of assets from one sovereign to his or her successor. Prince Philip, however, was the consort of the sovereign and as such his estate does not benefit from this special provision.
As a result, any assets held by Prince Philip personally would be subject to the rules on inheritance tax which we summarise below.
The Spouse Exemption
Spouses and civil partners benefit from an exemption from inheritance tax where they pass assets between each other in lifetime or on death. The effect is that, where the surviving spouse or civil partner receives any or all of the assets from the predeceasing spouse, they are able to add those assets to their own estate without inheritance tax consequences, and then retain or dispose of them as they see fit.
No matter to whom their estate is left whether under a Will or on intestacy, every individual benefits from a tax-free “nil-rate band” of £325,000. The balance of their estate is subject to inheritance tax at 40%, subject to the comments below.
Upon death, where the estate of the first spouse or civil partner to die is left to the survivor, the predeceasing spouse or civil partner’s nil rate band can be transferred to the survivor, meaning that on the survivor’s death assets worth £650,000 would not be subject to inheritance tax.
Residence Nil Rate Band
For estates where the deceased is passing their home (or, if they have sold up and moved into rented accommodation or a care facility, assets representing the sale proceeds of the former home) to direct descendants (including children, grandchildren and step-children) they may benefit from an additional nil-rate band known as the “residence nil rate band”. The value of this is currently £175,000 per individual (capped at the value of the property, if lower) and can be transferred to a surviving spouse in the same way as the ordinary nil-rate band. However, the benefit of the residence nil rate band, unlike the ordinary nil rate band, begins to tapers off on estates which are valued at over £2 million on death.
All donations on death to registered charities are exempt from inheritance tax. In addition, if 10% or more (after all other reliefs and exemptions) of an estate is left to such charities, the rate applicable to the portion of the estate liable to inheritance tax is reduced from 40% to 36%.
In circumstances such as those of the Royal Family, where the first spouse has died, the most efficient utilisation of the IHT allowances is for the entirety of the deceased’s estate to pass to the surviving spouse (or to charity). This then allows the whole estate to transfer free of inheritance tax and for up to £1 million of assets in the survivor’s estate on death to pass free of tax.
If you have any questions regarding inheritance tax or the tax exemptions which are available, our specialist team will be very happy to help.