What is Inheritance Tax?

Inheritance tax has been described as a voluntary tax paid by those who distrust their heirs more than they dislike the Inland Revenue. Yet, more than £2bl per year is collected in inheritance tax by the Inland Revenue.

Inheritance Tax is a tax on an individuals assets, payable on the transfer of those assets into another individuals name. That person is known as the beneficiary and it will be their responsibility to pay the tax.

Currently there are two levels of tax, a zero rated level which is the first £312,000 (for this tax year) and then any amount over £312,000 is taxed at a rate of 40%.

Do be aware that the first £312,000 is classed as zero rated, it is not tax free. This means that the government can introduce a lower level of tax on this amount in the future but currently they choose to tax it at a zero rate. 

It is important to bear in mind that the tax is due on the assets on death and subject to the seven year rule. This means that if you transfer an asset to someone and then subsequently die within 7 years then some tax is due, it is however on a sliding scale and that scale is below.

The nil rate band is effectively transferable between husband and wife.  Where one spouse has died with a chargeable estate for IHT of less than the nil rate band, the unused portion will be added to the nil rate band of the surviving spouse on the second death.  This relief applies where the survivor dies on or after 9 October 2007.

This is commonly known as the 7 year rule and is effective as follows:- 

Exemptions for inheritance tax

There are exemptions to inheritance tax, it is worth knowing all of these exemptions as careful planning based on sound knowledge can save a considerable amount of money in the future. Any money, items or assets of any kind passed between husband and wife. Any bills outstanding at death including funeral expenses.

Gifts

Wedding gifts of up to £5,000 to each of your children or the person that your child is marrying. (this can also include step-children and adopted children)

Wedding gifts up to £2,500 to each grandchild or the person that your grandchild is marrying.

Wedding gifts of up to £1,000 to anyone else.

Payments for the maintenance of your husband or wife, ex-husband or ex-wife, dependent relatives and, usually, your children who are under 18 or in full-time education

Other gifts up to a value of £3,000 in any one tax year, plus any unused balance of £3,000 from the previous tax year (The tax year starts on 6 April in one year and ends on 5 April in the following year.)

Dealing With Inheritance Tax

There are many ways in which you can deal with an inheritance tax liability. It should be noted however that the most efficient and effective planning needs to be done before death.

The first and most important part of good IHT planning is MAKING A WILL if you fail to make a will you will die intestate.

Here are some of the ways in which we can help you plan for IHT.

Making a will
Correct and up to date wills are the cornerstone of inheritance tax planning, yet far too many people die without having made one. If you don't have a will, you cannot guarantee your assets will be distributed the way you would like on your death.

Distributing your assets
No tax is due when assets are passed between a UK domiciled husband and wife, whatever the size of the estate. Unfortunately, as the sole owner of all the assets, a surviving spouse will almost certainly trigger a bigger IHT liability on his or her death. One solution is for a husband or wife to leave a slice of assets to others, including their children, as well as to their spouse.

Making lifetime gifts
If you potentially face a large inheritance tax bill, you can give assets to your children, relatives or other party with no immediate tax liability. Known as potentially exempt transfers (PETs), these gifts are subject to the seven-year rule. For example if you give away assets worth £40,000 and you live for another seven years, that £40,000 will not be taken into account when your estate is valued for IHT purposes. If you die within seven years, a sliding scale of tax is due if the PET causes you to exceed your zero rated or nil rate band for that tax year.