The information contained within the following news articles have been pre published. The articles were published on the dates indicated and the information contained within these issues include references to taxation, legislation, regulation and other issues or concerns that may no longer apply
Beginners Guide to Inheritance Tax (IHT) – Part 1
Inheritance Tax (IHT) has traditionally been seen as a tax on the wealthy. However with an allowance of £325,000 for the current tax year more people are finding their estate could be liable.
Our guide will show you how it works and give you some idea of the allowances available to help reduce the value of your estate. If you would like to speak to someone in more detail please do not hesitate to contact us.
What is IHT?
IHT is usually only payable on death and only then when assets are passed down a generation as assets passed between husband and wife are exempt. Even with the allowance of the Nil Rate Band, whenever you take into account the value of your main residence, investments, death-in-service benefits, other properties and even right down to the value of your car it could be quite easy to exceed this level.. In fact even after the start of the credit crunch in 2007 the treasury’s 2008/09 receipts from IHT payments was still up 20% on 2002/03 (source HM Treasury Inheritance tax analysis).
Any assets above this Nil Rate Band (NRB) will be subject to tax at 40%. IHT is payable six months after the end of the month of death. Also many estates will be ‘locked’ until the IHT is paid. This doesn’t give much time for a house to be sold and assets liquidated, especially in today’s market. So if your estate does exceed the NRB limit, what can you do?
As mentioned before, a husband and wife can transfer assets freely without attracting additional tax. This also applies to civil partners but NOT to cohabiters or ‘common law’ spouses.
The vast majority of other exemptions and allowance involve distributing or gift assets prior to death. Assets gifted away are usually referred to as ‘Potentially Exempt Transfers (PET’s)’. They are regarded as potentially exempt as the tax due on death is subject to a tapering over 7 years starting at 100% for the first three years reducing by 20% every year after until it falls to zero after 7 years from the date of the gift.
This also only applies if the value of the gift is above the NRB. If the gift is valued below this and you die within 7 years, then the full value of the gift is added back into your estate, and whilst there would be no tax on the gift it would have the effect of reducing the remaining Nil Rate Band.
There is a restriction on PET’s, and that is the ‘Gift With Reservation of Benefits’ rule. The basis of this rule is that you must give up the use of the asset whenever making the gift. So, for instance, you could not gift a holiday home to your children and then continue to use it yourself or continue to receive the rental income yourself. One way around this is whenever you use the holiday home yourself you also pay a market value rent to your children.
Gifts of £3,000 or less can be made each year using the annual allowance and if you don’t use the allowance one year you can carry it forward one more year. There is also a potential more lucrative allowance applying to regular gifts out of income. There is no limit on the value of these gifts, but they must form part of a pattern of giving and they must not reduce your standard of living.
You can also gift on consideration of marriage or civil partnership. The amounts vary depending on your relationship to the bride and groom, for example £5,000 is allowed from parents. Gifts to charities fall outside of your estate and you can also make small gifts of up to £250 to anyone. You can make as many of these small gifts as you like but they cannot be claimed in conjunction with any of the other allowances.
For part two, come back on Friday 25th November.
Chartered Financial Planner