Inheritance Tax — Planning Ahead
It is no surprise that inheritance tax (IHT) is one of the most despised taxes. IHT is primarily a tax that takes effect on death. When a person dies, IHT is charged on the value of their estate subject to various exemptions and reliefs. The value of the estate is broadly assets less liabilities. It is charged at 40 percent of all assets in an estate, above £325,000, commonly referred to as the nil rate band. In 2010, the nil rate band will be £350,000.
Even with the reported downfall in property prices, many people still have property which will be valued above the £325,000 threshold and this property asset alone can unexpectedly use all the tax free allowance, resulting in the remainder of your estate potentially being subject to a 40% tax liability. It is worth noting that IHT is not payable when an estate passes between a husband and wife or from one civil partner to another. In addition, spouses and civil partners who have not used their tax free allowance upon their death can transfer the unused part of their tax free allowance to the survivor. For example, upon the death of a wife who has inherited all of her husband‘s money, IHT will only be payable on assets above a combined total of £650,000.
- Make a will
If you do not have a will, your estate will be distributed in accordance with the intestacy rules. This may result in your estate being unnecessarily subject to IHT and also your estate will be distributed without your wishes being taken into account.
- Make gifts during your lifetime
All gifts made seven years or more before death can be free of IHT and are known potentially exempt transfers (PETS). There is IHT payable if the person making the gift does not survive seven years or more from the date of making the gift. The tax payable is 40 percent if the death is within three years and on a sliding scale if between three and seven years. Insurance is available to cover tax should the death occur within seven years of making the gift.
- Use your annual exemptions
It is possible to gift up to £3,000 per year. This can be increased to £6,000 if no gifts were made in the previous year. A couple who have made no gifts in the previous year can gift £12,000 as one gift to their children. Gifts up to £5,000 on a wedding or civil partnership may also be exempt.
- Use your small gift exemptions
This allows a gift of £250 to as many people as you like in any tax year.
Many solicitors specialise in Inheritance Tax and can advise you on the best ways to maximise what you leave to those specified in your will.