Probate Solicitors Limited - Wealth & Inheritance Tax
What is IHT?
Inheritance Tax, or IHT as it is more commonly known, is the tax payable by the estate of a person who has just died. Tax is due six months after the end of the month in which a person died otherwise interest is payable.
Where tax is payable the rate is 40% (accurate as at August 2019).
Gifts between man and wife, or between same sex couples who are in a civil partnership or married, are exempt from tax although a tax return still has to be completed. The receiving spouse must however be domiciled in England or Wales otherwise the exemption is limited. It may however be possible to elect to be domiciled here. Gifts to charity are also exempt.
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 (2019/20) The threshold increases periodically but is fixed for the immediate future.
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 and investments, your house (or your share of it if jointly owned) and everything else you own.
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 sufficient evidence of the value of the estate and how it was distributed.
Residential nil-rate band (RNRB)
In addition to the NRB there is an additional allowance of between £100,000 and £175,000 per person (depending on the date of death) if you leave your property (or equivalent amount in some cases) to a child or grandchild. As for the NRB, the RRNB is also transferrable to a spouse or civil partner. However there are many qualifying rules for this exemption and a special claim has to be made to HMRC to obtain it. You should take expert advice from a specialist solicitor if this applies to you.
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 seven years after making the gift it usually becomes free of Inheritance Tax. Any gifts you may in that period reduce your nil-rate band allowance by the same sum. Payments into a trust are also treated as lifetime gifts but are taxed slightly differently as chargeable lifetime transfers. You should check with a tax expert before paying any significant sums into a trust.
Tax Planning to avoid unnecessary IHT
A lot of unnecessary 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 unnecessary tax. There are also a number of exemptions that you might take advantage 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)
- update your Will to make sure you are not missing any reliefs
- Leaving exempt assets such as business interests or pensions in trust or to non-exempt beneficiaries
- rearranging your assets to maximize tax relief
- Consider gifts to charity to make use of the reduced 36% tax rate
- 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 seven years income and expenditure need to be produced to claim this successfully.
For more details on exemptions and reliefs see the Inland Revenue website.