The UK has the joint 4th highest rate of Inheritance Tax (IHT) in the world at 40%. Japan tops the table at 55% whilst New Zealand, Portugal, and Sweden (among others) have a 0% Inheritance Tax rate. HMRC received £6.1 billion from IHT alone in the financial year 2021-2022.
Broadly speaking, IHT is charged at 40% on the net value of your estate which is over the available £325,000 Nil Rate Band threshold. In 2021 Forbes estimated her late Majesty Elizabeth II’s private wealth to be $500 million, so it is not surprising to see a heightened level of interest in the press following her death with some reports claiming that her estate may not be subject to Inheritance Tax: https://www.independent.co.uk/news/uk/politics/charles-inheritance-tax-uk-exemption-queen-b2165962.html
In fact, IHT is payable on her Majesty’s estate (subject to the usual reliefs and/or exemptions available), but not on all assets and interests held.
We can separate her Majesty’s perceived wealth into the following categories:
- The Crown Estate
The Crown Estate is estimated to be worth around £15 billion and belongs to the reigning Monarch. However, it cannot be sold, and its revenues do not belong to the Monarch. Instead, a portion of the profits fund the Sovereign Grant to facilitate the Monarch’s official duties.All surplus revenue is paid to the Treasury for the benefit of the nation’s finances.
- The Duchy of Lancaster
The Duchy of Lancaster is a private estate held in trust for the Sovereign which provides an independent source of income to supplement the Sovereign Grant. The Monarch is entitled to the income generated from the estate and this is often used to fund members of the wider Royal Family. At the end of March 2022, the Duchy of Lancaster reported that they held net assets valued at £652.8m
- The Queen’s private estate
Independently from the Crown Estate and the Duchy of Lancaster, her Majesty had considerable private wealth including the Balmoral and Sandringham Estates, artwork, racehorses, and personal investments.
In 1992, her Majesty asked John Major (then Prime Minister) to consider the basis on which she might voluntarily elect to pay tax on her personal income. On 6th April 1993, a memorandum of understanding which contained detailed rules for income tax, capital gains tax and inheritance tax came into force.
The headlines were (and continue to be) as follows:
- Income Tax – her Majesty elected (with no legal obligation) to pay income tax on all personal income as well as on that part of the privy purse (i.e., the Duchy of Lancaster) which is used for private purposes.
- Capital Gains Tax – her Majesty, again elected, to pay tax on any realised capital gains on her private investments and on the private proportion of assets in the privy purse.
- Inheritance Tax – inheritance tax applies in the usual way (i.e., payable at 40%), other than for any assets deemed for the benefit of the Sovereign’s successor (i.e., Sovereign to Sovereign transfers to King Charles III).
In summary, assets inherited by King Charles III from her Majesty’s estate, such as the Duchy of Lancaster, will not be subject to Inheritance Tax. However, income Tax, capital gains tax, and IHT (on all other gifts made by the late Queen to anyone other than the new King) will be subject to tax in the usual way.
The headlines are somewhat misleading without consideration of the wider context. Taxing ‘Sovereign to Sovereign transfers’ on death would deplete the Monarch’s private estate at a rate of 40%. The argument is that the Monarchy’s financial independence would then be reduced and perhaps increase the strain on the public purse.
If you are acting in the administration of an estate and are trying to work out whether an IHT liability arises on the assets held, please do get in touch as we have a specialist Private Client team who can help with probate, taxation, and estate administration matters.