What is Inheritance Tax?
Inheritance Tax is the tax levied by the government on your estate when you die. Essentially it is a very simple tax – a charge of 40% is made on the net value of everything that you own above a designated threshold which is called the Nil Rate Band (commonly referred to as the NRB).
It is levied on the net value of everything that you own, including your main residence, any second property , any cash savings and investments you may have, cars, boats, personal effects (jewellery for example) and even the value of your life assurance policies.
Currently the Nil Rate Band threshold for 2008/9 is £312,000 which will rise in stages to £350,000 in 2010/11.
And it is not just a tax on the very wealthy. Recent rises in property values and increased personal wealth mean that many more people own assets which are (or will be) valued well above the NRB threshold.
So without IHT planning your family could be faced with a very large tax liability when you die, meaning that they will not benefit as much as they should from your estate - but the government will!
It is now possible to transfer unused nil-rate band allowances between spouses or civil partners. For individuals who die on or after 9 October 2007 a claim may be made to utilise any unused nil rate band from their deceased spouse or civil partner's estate.
The amount of the nil rate-band potentially available for transfer will be based on the proportion of the nil-rate band unused when the first spouse or civil partner died. If on the first death the chargeable estate is £156,000 and the nil-rate band is £312,000, then 50% of the original nil-rate band is unused. If the nil rate band when the surviving spouse dies is £350,000, then that would be increased by 50% to £525,000.
All lifetime transfers not covered by exemptions and made within seven years of death will be added back into the estate for the purpose of calculating the tax payable. This may then be reduced by taper relief.
| Charge on Gifts Within 7 Years of Death |
| Years before death | 0-3 | 3-4 | 4-5 | 5-6 | 6-7 |
| Tax reduced by | 0% | 20% | 40% | 60% | 80% |
| Main Reliefs |
| Business property: |
| business or interest therein | 100% |
| qualifying shareholders in unquoted* companies | 100% |
land, buildings, machinery, or plant used
by transferor's controlled company or partnership | 50% |
| Agricultural property | 50% or 100% |
| *Unquoted companies include those listed on AIM |
Main Exemptions
- Most transfers between spouses and civil partners.
- The first £3,000 of lifetime transfers in any tax year plus any unused balance from previous year.
- Gifts of up to but not exceeding £250p.a. to any number of persons.
- Gifts in consideration of marriage or civil partnership: up to £5,000 by a parent, up to £2,500 by a grandparent, or up to £1,000 by any other person.
- Gifts made out of income that form part of normal expenditure and do not reduce the standard of living.
- Gifts to charities, whether made during lifetime or on death.
- Gifts to political parties
How much Inheritance Tax might my family have to pay?
Assuming that you did nothing at all to reduce your Inheritance Tax liability, this table shows exactly what your family’s liability might be:
| Estate Value | Amount Taxable * | IHT payable at 40% |
|---|
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* Based upon 2008/09 tax year Nil Rate Band
But with sound financial advice, careful planning and making full use of the IHT Allowances and Exemptions, your liability can be significantly reduced, all perfectly legally, through reducing the value of your estate over a number of years.
Typical approaches to reducing IHT liability are:
• The efficient use of Trusts
• Ensuring assets are individually owned by family members up to the NRB threshold
• Putting a suitable Will in place
• Making full use of all Allowances and Exemptions
• The giving of Assets as gifts (often called Gifted Assets)
• The use of IHT efficient investments
It is very important to consider planning well ahead, while you are still in good health. For example, Gifted Assets retain a (reducing) liability over seven years from the date of the transfer.
If you would like to speak to an adviser about reducing your IHT liability or arrange a no commitment consultation then contact us on 0845 555 0 888 or alternatively please use the link below.
Remember, the worst thing you can do is nothing – the government will benefit from your estate rather than your loved ones!
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