What is Inheritance Tax?
Inheritance Tax (IHT for short) is levied at a flat rate of 40% on the value of an estate, less certain exemptions. The most important of these exemptions is a tax-free allowance of £312,000 (known as the 'Nil Rate Band'). A taxable estate typically includes the value of the family home. An estate is liabile for tax on assets owned worldwide if the deceased was UK domiciled or deemed domiciled for IHT purposes.
IHT on Lifetime Gifts
Lifetime gifts to individuals are either exempt (because they are made to a spouse, or are within the annual £3,000 exemption) or potentially exempt. If the giver makes a potentially exempt gift and then survives more than 7 years after making it, it will remain exempt. If not, the gift may be taxed if the net estate exceeds £312,000. As a general rule, it is the responsibility of the person who received the gift to pay the tax – and not the estate of the person who has died.
Different rules apply if lifetime transfers are made to certain types of trust. Please contact us is you require more information.
Lifetime Exemptions
When making a lifetime gift, there are important exemptions from IHT:
gifts between spouses and registered civil partners
gifts to charities
an annual exemption of £3,000 in each tax year plus any unused balance of £3,000 from the previous year only.
marriage gifts of £5,000 to a couple from each parent (£2,500 if a grandparent, otherwise £1,000)
gifts out of normal income expenditure
small gifts of up to a maximum of £250 per person
maintenance payments
You cannot always combine tax-free gifts, for example, you cannot combine the annual allowance of £3,000 and the small gifts allowance of £250 to the same recipient.
Nil Rate Band: how to avoid wasting it
Everyone is entitled to pass on to their beneficiaries £312,000 worth of assets, including property, tax free which is known as the ‘Nil Rate Band’. Any amount over and above this threshold of £312,000 attracts inheritance tax (IHT) at 40%. The only exemptions to this rule are for gifts to your spouse, registered civil partner or to charity under your will. For IHT purpose your estate also includes any gifts (in excess of £3,000 per year) made 7 years prior to your death.
Traditionally, most married couples leave their estates to each other in their wills. On the death of the second spouse, the nil rate band belonging to the first spouse to die can (since October 2007) be transfered to the survivor. However this does not apply to unmarried couples who would still benefit from having tax-efficient wills.
With forward planning there are several ways of mitigating the effects of IHT. A tax-efficient will can save up to £124,800 in inheritance tax. Such wills can help you to shelter the value of your home and other assets in your taxable estate from Inheritance Tax. They are often known as Nil Rate Band Discretionary Trust Wills.
Can I save more than £124,800 in Inheritance Tax?
There are ways to avoid or reduce an Inheritance Tax bill on death. One of the simplest ways is to simply give away as many assets as you can afford and survive 7 years (see lifetime gifts). These are called Potentially Exempt Transfers because they are ‘potentially’ free of IHT. However, many people cannot afford to give away their assets during their lifetime not least because their principal asset is their home.
