What is inheritance tax?
Inheritance Tax (IHT) may be payable following your death, depending on the value of your estate as calculated for tax purposes. Currently the first £325,000 (the nil rate band) is free of tax wherever it goes; the balance of your chargeable estate is subject to tax at the rate of 40%.
No IHT liability arises on an outright lifetime gift to an individual at the time when the gift is made. Such a gift will escape IHT if you survive seven years from the date of the gift. Gifts within seven years form part of your aggregate chargeable transfers and affect the IHT payable on your death.
If the total of your lifetime gifts within the seven-year period is within the nil rate band, there is no IHT liability but the amount of your nil rate band available on your death will be reduced by the amount of such lifetime gifts.
If the total of your chargeable lifetime gifts is greater than the nil rate band there will be an IHT liability. However, if you survive more than three years and less than seven, the amount of tax on the gift reduces on a sliding scale and ‘taper relief’ applies.
From 2006 most lifetime gifts into trust give rise to an immediate IHT liability insofar as the nil rate band is exceeded. Tax is payable at 20% but if you die within 7 years of setting up the trust, an extra liability to IHT is payable on death.
It is essential that any lifetime gifts are given outright and that you do not reserve a benefit – for example giving away your house and continuing to live there.
If you are domiciled or ‘deemed domiciled’ in the UK, then your worldwide estate is subject to IHT.
If you leave at least 10% of your net estate to charity, you may be able to pay a reduced rate of IHT of 36%.
Inheritance tax exemptions
The most common exemption is the ‘Spouse Exemption’ which means there is no liability to IHT for transfers between spouses and civil partners whether during lifetime or on death. This means that on the death of one spouse who leaves everything to the surviving spouse whether outright or by setting up a trust giving that spouse a life interest, there is no IHT to pay. Only if more than the nil rate band is left to people other than the surviving spouse will there be IHT liability.
With effect from 9 October 2007, on the death of a surviving spouse a claim can be made to transfer any unused nil rate band of the first spouse to die to the estate of their surviving spouse. If the full ‘transferable nil rate band’ is available, this means that there are two lots of nil rate bands to use against the estate of the surviving spouse – currently £650,000.
There are specific exemptions for agricultural and business property, which are extremely valuable for anyone owning their own business or involved in farming. There are also exemptions for woodlands, heritage property and gifts to charity.
Other exemptions that can be used during one’s lifetime include:
Gifts out of income. If your income is greater than your expenditure, you can give away your excess income provided there is a regular pattern and the giving lasts for a number of years. Very careful records must be kept.
You can give away £3,000 a year. If you have not used the previous year’s exemption, then this can be carried forward but for one year only.
You can give £250 a year to any number of people provided that they are not amongst those to whom you have given all or part of the £3,000.
If your child or grandchild is getting married, each parent can make a gift of £5,000 and each grandparent £2,500.
In London, property prices have increased substantially. Taking into account your other assets including cash and investments, you may be surprised at the significant IHT liability, which would arise on your death.
There are ways to minimise this and we, at WGS Solicitors, will be pleased to advise you on both lifetime gifts and how to reduce your IHT liability on death.