Inheritance Tax

Inheritance tax is something most people do not have to worry about. This is because either the value of their estate falls below the threshold for the tax, or their finances have been organised in a tax efficient way to avoid it. For those with concerns tax planning is essential.

The threshold

You only have to begin paying IHT at a certain point. The current threshold is £285,000. (This will rise to £300,000 for the tax year starting in April 2007.) If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds this figure, tax will be due on the balance at 40%.

Inheritance inclusions

A person's estate includes everything owned in their name; the share of anything owned jointly; gifts from which they keeps back some benefit, such as a home given to a son or daughter but still lived in by the parent; assets held in trust from which they receive an income.

Against this total value is set everything that the deceased person owed, such as, any outstanding mortgages or loans, unpaid bills, and costs incurred during their lifetime for which bills have not been received, as well as funeral expenses.

Avoiding IHT

Any amount of money given away is not counted for tax if the giver survives for seven years. These gifts are called potentially exempt transfers and are useful for tax planning.

Money put into some types of trust counts as a potentially exempt transfer, so it is possible to give money away into a trust to stop grandchildren, for example, having access to it until they are older.

Gifts that are exempt

Some cash gifts are exempt from tax regardless of the seven-year rule. They include: wedding gifts of up to £5,000 to each of your children; Wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else; other gifts of up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year); gifts of up to £250 each to any number of people each year; gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations.

Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as the giver still has sufficient income to maintain their standard of living.

Any gifts between husbands and wives are exempt from IHT whether they were made while they were both still living or left to the surviving spouse on the death of the first. Tax will be due eventually when the surviving spouse dies if the value of their estate is more than the tax threshold.

Death within the seven-year period

If gifts are made that affect liability to IHT and the giver dies less than seven years later, a special relief known as taper relief may be available. The relief reduces the amount of tax payable on a gift. (See table below)

When the tax must be paid

In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years. Though if the asset is sold before all the instalments have been paid the outstanding amount must be paid. The IHT threshold in force at the time of death is used to calculate how much tax should be paid.

There are various different ways to plan for this so please contact us to discuss.