Welcome to the Inheritance Tax Blog
Inheritance Tax (IHT) is a tax on the value of a person’s estate on death and on certain gifts made by an individual during their lifetime.
There is a certain threshold when it comes to inheritance tax. This is defined as the amount above which inheritance tax becomes payable. If the estate, including any assets held in trust and gifts made within seven years of death, is less than the threshold, no inheritance tax will be due on it. Starting from April 2007 the threshold, also known as the nil-rate band is £300 000. For transfers on death, the value of an estate above the mentioned band is taxed at a rate of 40%. For lifetime transfers the tax rate is 20%.
There are a few things to consider when dealing with IHT:
• Gifts between husband and wife are generally exempt for IHT. It may be desirable to use the spouse exemption to transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and the potentially exempt transfers (PETs). With a PET the gift will be exempt from IHT if the donor survives for seven years.
• Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.
• £3,000 per annum may be given by an individual without an IHT charge. An annual exemption may be carried forward to the next year but not thereafter.
• Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.
• Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.
• Trusts can provide an effective means of transferring assets out of an estate whilst still allowing the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.
A good planning is essential when dealing with Inheritance Tax. Any plan must take into account your personal circumstances and aspirations. Taxfile in South London can help you find the best solution to minimize your tax liability.
An important point to consider is tax planning within a will, particularly if the person making the will is married. We often advise married couples about the best way to use their spousal exemption in order to deal with inheritance tax in the most efficient way.
After the Chancellors pre budget speech in October the IHT rules for married couples and civil partnerships has changed and the effectiveness of IHT wills is somewhat reduced. In some cases having an IHT could make a married couple or couple in a civil partnership worst off.
Trust will still can play a part in inheritance tax planning and also in helping protect some of the family’s assets from potential care cost assessment if one of the spouses outlives the other and then requires long term care.
Asset Protection trusts, Interest in Possession Trusts and Revokeable Lifetime Interest Trust could all have a role to play and should be consider. A good will writer should take the time to understand what is required and the discuss all the potential solutions.