How Inheritance Tax Works

Inheritance Tax (IHT) is paid on your estate when you die and also when money is transferred into some trust funds. Some other transfers during one’s lifetime may also be subject to IHT. The first £312,000 (at 2008/9 rates) of the estate is exempt from IHT. This is called the nil rate band. The assets in the estate are valued on death, the nil rate band subtracted and the remainder of the estate is taxed at 40 per cent.

IHT used to concern only the wealthy. Nowadays, however, the increase in value of residential property means that more and more people find themselves within its ambit.

There are exemptions from IHT for the following:

• property transfers between spouses or civil partners (not between unmarried partners);
• gifts to institutions such as the National Trust, charities and political parties; and
• gifts in consideration of marriage or civil partnership (within permitted limits), annual gifts to the value of £250 to anyone and gifts which are part of normal household expenditure (such as birthdays).

You are also allowed to give away up to £3,000 per annum. This allowance can be carried forward to the next year, if not used in a tax year. The carry forward is for one year only.

Gifts made ‘out of income’ are also excluded. These must be of a scale that does not affect the lifestyle of the donor and must normally be regular – an example might be school fees paid by a grandparent.


What Can be Done to Reduce IHT Liability?

• Potentially Exempt Transfers (PETs). A gift will normally cease to be part of a person’s estate if they survive seven years after making it. If they die within seven years, then the IHT to be paid will be reduced on a sliding scale depending on the time interval between the making of the gift and the death of the donor.

• Equity Release. An Equity Release Scheme (of which there are several types) allows money locked in freeholds to be released. This can be given away as a PET and if the donor survives more than seven years then it will not normally attract an IHT liability.

• Life Assurance. Policies are available which may pay all or some of your IHT liability. These can be written in such a way that they pass directly to your family and do not become part of your taxable estate.

• Holding Exempt Assets. Certain assets (such as shares in AIM-listed companies and in family businesses) are wholly or partially exempt from IHT if certain conditions are met.

• Trust Funds. Setting up a trust fund used to be a common way to leave money. This can be an effective way of minimizing the impact of IHT. However, chnages made in the 2006 Finance Act has made some of these less attractive. If you have established such a trust or are thinking of doing so, it is sensible to seek professional advice.

 

 

 

 

 

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.