Probate Solicitors Limited - Wealth & Inheritance Tax

Inheritance Tax

What is IHT?                                     Download our free PDF leaflet on Inheritance Tax

Inheritance Tax or IHT as it is more commonly known is the tax payable from the wealth of a person who has just died. Tax is due within six months of the date of death otherwise interest is payable. Where tax is payable the rate is 40%

Gifts between man and wife or between same sex couples who are in a civil partnership are exempt from tax although a tax return still needs to be completed. The receiving spouse must however be domiciled in England or Wales otherwise the exemption is limited to £55,000 (2011/12 rates).

What is the threshold for Inheritance Tax?

Fortunately you DO get a tax free allowance. This is called the "threshold" or "nil-rate band" (NRB). This is currently £325,000 (2011/12) The threshold normally increases roughly in line with inflation but unfortunately it is unlikely to increase in the next three years or so according to the current government.

This means that you do not pay tax on the value of your assets (your "estate") up to £325,000 but you pay 40% on everything over that. Your "estate" includes your savings & investments, your house (or your share of it if jointly owned) and everything else you own.

Lifetime gifts

For IHT purposes your estate also includes gifts made by you in the seven years prior to death. These are known as Potentially Exempt Transfers or PETs. If you live 7 years after making the gift it becomes free of Inheritance Tax.

Transferrable Nil-Rate Band (NRB)

Since 2007 you have also been able to claim your late spouse or civil partner's Nil Rate Band if they did not use it. In other words you are able to "transfer" their relief or the proportion of it that they did not use. This is not automatic and a claim form has to be completed and supported by a copy of the marriage certicate, the Will if any, the late spouse's probate or death certificate and some evidence of the value of the estate and how it was distributed.

Tax Planning to avoid unecessary IHT

A lot of unecessary tax can be avoided by proper planning, including the use of Wills and trusts. You should take specialist legal advice at an early stage because forward planning is the best way of avoiding unecessary tax. There are also a number of exemptions that you might take avantage of including:-

  • Annual Exemption - gifts totalling £3000 each tax year
  • Wedding gifts - £5000 for child, £2500 for grandchild, £1000 for others
  • Small gifts - £250 or less per person (unlimited number of people)
  • Regular gifts from excess income. Strict rules apply to this so take advice.

The importance of keeping records cannot be stressed strongly enough. This is particularly true if making gifts from excess income; details of the last 7 years income and expenditure need to be produced to claim this successfully.

For more details on exemptions and reliefs see the Inland Revenue website

Download our free PDF leaflet on Inheritance Tax

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