Updated: Jul 4, 2023
In the United Kingdom, there exists an inheritance tax imposed on gifts. However, it is possible to avoid paying this tax if you remain within the threshold value and take advantage of applicable exemptions in a given calendar year. It is important to consider the 7-year rule, which limits the gifts you plan to make towards the end of your life. Fortunately, there are various tax reliefs available that can help minimize your inheritance tax liability. These reliefs include provisions for spouses, charitable donations, contributions to political parties, businesses, agriculture, and tax relief for adopted, foster, or stepchildren or grandchildren. You can also save on taxes by creating a Trust and utilizing the yearly exemption on gifts made to any individual. Furthermore, specific tax considerations is required for non-domiciled individuals in the UK. Understanding the requirements and implications of inheritance and gift tax is crucial to avoid overpaying. Failure to have a well-thought-out Muslim estate planning strategy may result in unnecessary expenses and unexpected tax bills. The debt must be settled before the distribution of an estate upon death, aligning with both the legal laws of the UK and Shariah principles in Islam. To ensure your Islamic estate planning goals are met in both the short and long term, it is advisable to have a comprehensive understanding of tax regulations. Wassiyyah provides useful tools and resources that can assist you in visualizing the impact on your wealth and estate planning outcomes. By leveraging these resources and incorporating a robust Muslim estate planning strategy, you can effectively navigate the complexities of inheritance and gift tax while safeguarding your assets and adhering to your Islamic principles.
To know how much gift and inheritance tax is to be paid, the first thing to do is complete the deceased asset valuation to know the exact amount of estates. The second thing is reporting this valuation. You can find more information HERE.
For the person who is died within 7 (seven) years of giving away all or part of your property, your home will be treated as a gift, and the 7 (seven) years rule applies, meaning it limits your ability to make gifts before the end of life (i.e., seven years before death). If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given three years before you die, and Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’ as below.
You will pay 40% on gifts given within 3 years before you die.
You will pay 32% on gifts given between 3 to 4 years before you die.
You will pay 24% on gifts given between 4 to 5 years before you die.
You will pay 16% on gifts given between 5 to 6 years before you die.
You will pay 8% on gifts given between 6 to 7 years before you die.
You will pay 0% on gifts given between 7 or more* years before you die.
For example, a person died in early July of the calendar year. Assuming he was not married or in a civil partnership when he died and was also a resident of the UK during the time he gave the gifts. A person left 2 (two) gifts in the 7 (Seven) years before his death: The first gift was £400,000 to his brother 6.5 years before his death, and he gave £100,000 to his sister 4.5 years before his death. Also, assuming a person is not entitled to any other gift exemptions or reliefs and a £325,000* inheritance tax threshold for the calendar year. Anything below this amount is tax-free. The value of the gift of £325,000 (out of a total of £400,000) is used up by the gift he gave it to his brother. There’s no inheritance tax on his gift for the amount of £325,000 (out of a total of £400,000). The total remaining amount on which the tax is payable includes £75,000 (£400,000 less £325,000*) and £100,000 he gave a gift to his sister. There’s a tax on the amount not covered by the threshold. This means a person will be paying an 8% inheritance tax of £75,000 on the gift he gave to his brother and also has to pay a 24% inheritance tax of £100,000 on the gifts he gave to his sister. So the total inheritance tax payable amount will be £30,000 (total of £6,000 PLUS £24,000).
The person who deals with your estate will need to work out what gifts you gave in the 7 (Seven) years before your death. You should keep the following records of what you gave and who you gave it to, the value of the gift, and when you gave it.
The inheritance tax rules in the UK are as follows.
No inheritance tax if you are the married spouse or in a civil partnership. The Spouse or a civil partner must live permanently in the UK and be legally married to qualify. If your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. So Spouse can potentially have limits double the amount (i.e., 2x £325,000 threshold).
No inheritance tax if the total estate value is below a threshold value ( approximately £325,000).
No inheritance tax if the Money (or gift) is left to the charity, political parties, or a community amateur sports club.
No inheritance tax, and your threshold can increase to £500,000 if you give away your home to your children (including adopted, foster, or stepchildren) or grandchildren, and your estate is worth less than £2 million.
No inheritance tax if you move out and live for another 7 (Seven) years or die after 7(Seven years). If you want to continue living in your property after giving it away, you must pay rent to the new owner at the going rate (for similar local rental properties), pay your share of the bills, and live there for at least 7 (Seven) years. You do not have to pay rent to the new owners if you only give away part of your property and the new owners also live there. Otherwise, it counts as a "gift with reservation" and will be added to the value of your estate when you die. (The "gift with reservation" is where you give something away but continue to benefit from it, whether it be a home, caravan, or valuable painting). Gifts include money, household and personal goods, for example, furniture, jewelry or antiques, a house, land, or buildings, stocks and shares listed on the London Stock Exchange, or unlisted shares you held for less than 2 (two) years before your death. A gift can also include any money you lose when you sell something for less than it’s worth. For example, if you sell your house to your child for less than its market value, the difference in value counts as a gift. The 7 (Seven) year rule does not apply to gifts with reservation.
No inheritance tax, and you can give as many gifts of up to £250 per person as you want during the tax year if you have not used another exemption on the same person.
The inheritance tax is payable at a reduced rate in one or more of the following situations in the UK. You can find more information HERE.
BUSINESS TAX RELIEF: After the threshold amount, the inheritance tax is required to pay approximately 40%. You can get business relief of either 50% or 100% on some of the estate's business assets which can be passed on while the owner is still alive or through a Will after death. Irrespective of whether Inheritance tax is applicable, your executor or trustee must value the estates and submit a report upon death (See information HERE). For example, Your estate is worth £600,000, and if your yearly tax-free threshold is £325,000 for example and if the Inheritance Tax charged will be 40% of £275,000 (£600,000 minus £325,000) and you will be paying £110,000.
CHARITABLE DONATION RELIEF: When a will contains a charitable legacy leaving at least 10% of the net value of an individual’s estate to a UK-registered charity, this will reduce the inheritance tax rate applied to that estate by 10% — meaning that the effective tax rate will be reduced to 36%.
TRUST'S EXEMPTIONS: Certain trusts are also liable to Inheritance tax on each 10-year anniversary of the trust’s creation and distributions to beneficiaries between these anniversaries. The maximum rate charged at these events is 6% of the fund value.
MAKING GIFTS TO INDIVIDUAL: If you are making a gift to an individual, It can be anything that has value, such as money, property, or possessions, a loss in value when something’s transferred, for example, if you sell your house to your child for less than it’s worth, the difference in value counts as a gift.
GIFTS MADE THROUGH TRUST: The main situations in which Inheritance Tax is dues made on Trusts are as follows. There are some exceptions to the following rules, and CLICK HERE for more information.
When assets are transferred into a trust.
When a trust reaches a 10-year anniversary of when it was set up (there are 10-yearly Inheritance Tax charges)
When assets are transferred out of a trust (known as ‘exit charges’).
When the trust ends when someone dies, a trust is involved in sorting out their estate.
ANNUAL EXEMPTIONS: You can use more than one of these exemptions on the same person - for example, you could give your grandchild gifts for her birthday and wedding in the same tax year. You can give away £3,000* worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption.’ You can carry any unused annual exemption forward to the next year - but only for one year. Each tax year, you can also give away the following:
Wedding or civil ceremony gifts of up to £1,000* per person (£2,500* for a grandchild or great-grandchild, £5,000* for a child).
Normal gifts out of your income, for example, Christmas or birthday presents - you must be able to maintain your standard of living after making the gift.
Payments to help with another person’s living costs include an elderly relative or a child under 18.
Gifts to charities and political parties.
SPECIAL RULE FOR DOMICLED: There are special rules regarding taxation for non-UK domiciled and not UK deemed domiciled. Inheritance tax is levied on the worldwide estate of a decedent who was domiciled in the UK and on the UK- sited assets of a person who was neither domiciled nor deemed domiciled in the UK.
The executor or personal representatives must agree on any Inheritance Tax liability arising from the death with HMRC Trusts & Estates IHT. You may need to contact HMRC Trusts & Estates IHT to check several points relevant to Capital Gains Tax to know when the Inheritance Tax liability was finalized and paid to check when residue was ascertained; see CG30800 guide. Also, to know whether the values of assets were ascertained for Inheritance Tax purposes to establish whether a Capital Gains Tax acquisition cost has been determined, see CG32220 - CG32230 guide. Also, to know whether HMRC Trusts & Estates IHT accepted a deed of disclaimer or variation as valid and how they treated any late election relating thereto to decide on the Capital Gains Tax consequences of any such deed, see CG31522 and CG31669 guide.
If you live in, as your home, two or more houses, you can only have one main residence at a time for Private Residence Relief. You can nominate which residence will be treated as your main residence for any period. Your nomination must be made within two years of the date you first have a particular combination of residences. If there is a change in your combination of residences, a new 2-year period begins. If you don’t make a nomination, the question of which is your main residence will be determined by the facts.
If you’re married or in a civil partnership and you’re not separated from your spouse or civil partner, you can have only one main residence between you. If, when you married or registered as civil partners, you each owned a residence and you’ve continued to use both residences, you can nominate jointly which is to be the main residence. The 2 (two) years for doing so begins on the date of marriage or registration as civil partners.
If you’re separated, you may have a different only or main residence, and each may be entitled to relief on any gains arising on the disposal of the residence(s).
ELIGIBILITY FOR FULL RELIEF: You may be eligible for tax relief If you dispose of a dwelling house (which can include a house, flat, houseboat, or fixed caravan) which is your home part of a dwelling house which is your home part of the garden attached to your home you would normally have to pay Capital Gains Tax on any gain you make However, you’ll be entitled to full relief where all the following conditions are met.
The ‘dwelling house’ has been your ‘only’ or ‘main residence’ throughout your ‘period of ownership'.
You’ve not been absent, other than for an allowed period of absence or because you’ve been living in ‘job-related accommodation’, during your ‘period of ownership’.
The ‘garden or grounds’, including the buildings on them, are not greater than the ‘permitted area’.
No part of your home has been used exclusively for business purposes during your period of ownership.
ELIGIBILITY FOR PARTIAL RELIEF: If not all of the conditions are met for full relief, you may still get partial relief under certain circumstances, and you’ll need to complete the "Capital Gains Tax summary" pages of your tax return which can be found HERE.
ELIGIBILITY FOR RELIEF ON RESIDENCE PROVIDED TO DEPENDENT RELATIVES: In addition to the relief that may be due on the disposal of your residence, you may also be entitled to relief when you dispose of a residence that you’ve provided for a dependent relative. This relief only applies if you acquired the residence before 6 April 1988 and certain additional conditions were met.
NIL-BAND RATE EXEMPTIONS: If someone dies and their estate is worth more than the basic Inheritance Tax threshold, their estate may qualify for the residence nil rate band (RNRB) before any Inheritance Tax is due. You can learn more HERE.
NON-ELIGIBILITY FOR RELIEF: Even if you meet all of these conditions, you won’t get Private Residence Relief, if you dispose of all or part of your garden after you’ve disposed of your home. You acquire a dwelling house and/or spend money on it to realize a gain at its disposal.
CAPITAL LOSS SCENARIO ON DISPOSAL: If you make a loss on the disposal of your home and you would have got Private Residence Relief if you had made a gain, your loss won’t be allowable, and you won’t be able to offset it against any gains you’ve made. If you would have got partial relief, part of your loss won’t be allowable, and that part should be calculated in the same way as you would have calculated the partial relief if you had made a gain.
CAPITAL GAINS TAX FOR RESIDENTS: From 6 April 2015, if you sell (or dispose of) the whole or part of an interest in a UK residential property when non-resident, you must tell HMRC within 30 days of conveyance, and you may have to pay Capital Gains Tax on any gains you make.
The executor or personal representatives are responsible for settling any Income Tax liability on untaxed income arising from the estate in the administration period. Similarly, if the executor or personal representatives sell any chargeable assets in this period, otherwise, then as bare trustees, see CG34300 guide. They must settle any liability to Capital Gains Tax. Until this is done, the period of administration will continue. See TSEM7204 for guidance on which office should deal with the administration period. The bigger and more complex estates are dealt with by HMRC Trusts & Estates Cardiff; see TSEM7376 and TSEM7406 guide. In any case, where the residue of the Estate will be held on trust at the end of the administration, TSEM7366 requires form 980 to be issued to HMRC Trusts & Estates. See CG30320 - CG30430 guide for further details.
There is Endowment and Wealth tax in the UK.
There is no death grant in the UK.
Paying the tax will affect based on how you report the estate’s value and the deadlines for reporting and paying any tax. If the estate’s value is below the threshold, you must report it to HM Revenue and Customs (HMRC). You can report the estate's value HERE. In England and Wales, Form IHT400 must be used to deliver an account of a deceased’s taxable estate to HM Revenue & Customs (HMRC) Capital Taxes Office within 12 months of the end of the month of death. Any inheritance tax due must also be paid within six months after the end of the month in which the deceased died. This is normally done simultaneously with the application for a grant of probate to administer the estate, as the tax must be paid before this is issued. In Scotland, the rules are slightly different. An inventory of the estate must be completed and presented to the local Sheriff Clerk or Commissary Office in Edinburgh for the issue of Confirmation (which is the equivalent of the grant of probate) along with a C5 Form if the estate qualifies as either an excepted estate or an exempt excepted estate. Form IHT400 must be submitted to HMRC if the estate does not qualify. All the accounts should be sent in within 12 months of the end of the month in which the death occurred.
Elements of Islamic Will and Inheritance Tax by Hajj Ahmad Thomson
Guide "Valuing the estate of someone who is died" on www.gov.uk under Death and Bereavement.
Guide "Inheritance tax" on www.gov.uk under Death and Bereavement
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