Inheritance Tax
Inheritance Tax can be a complicated subject. Below you will find some information you might find useful.If you would like us to advise you or have any questions phone us on 020 8945 0323.
Introduction
This guide gives a brief overview of Inheritance Tax. It is not intended as a do-it-yourself manual but rather to put the reader in the best position to make decisions or to discuss the subject with us and arrive at the most appropriate approach for him or her. The examples are based on the IHT rates for 2007/08.
Part 1
At present any estate (that is the value of all your property at the date of death minus any debts) worth more than £300,000 faces 40% tax. This used to be 75% and what it will be in the future is unknown. Gifts to a husband or wife are exempt from tax for the time being but do end up being taxed after the second death, for example if you own property worth £600,000 and leave it all to your wife or husband, no tax is payable on your death. When they die, assuming the property is still worth £600,000, tax would be due on £300,000 (£600,000 less the personal tax exemption of £300,000) at 40%, a total of £120,000 .
A little planning ahead could save all that tax being paid to the Government and make sure all your money went to your family or friends instead.
If instead of leaving all the property to your spouse, you had perhaps given it to your children or other beneficiary, you would have been able to use your tax allowance of £300,000 and your spouse's exemption of £300,000 as well in due course. Result… No tax payable.
The example is a simplified one but it does show a potential saving of tax ultimately of £120,000. In addition, there are other ways in which tax may be reduced.
If you think you might benefit from tax planning advice, please let us know and we will advise you in more detail. The type of information we would need is approximately how much your various assets are worth, who you want them to go to in the end and what level of control over them you feel you need. You may not want to give a share of your house to a child if you do not feel able to trust them to co-operate with your wife, husband or other beneficiaries. If so we can advise you on the appropriate use of a Trust to achieve your objective safely.
For more information on inheritance tax click here: www.inlandrevenue.gov.uk/pdfs/ir45.htm
If you are not in the happy position of having enough money to worry about inheritance tax, you may have the opposite problem - not enough money to ensure your dependants are looked after. A couple with a young family will have problems if either the husband or wife die. A wife may be left without a wage earner and a husband may be left unable to carry on full-time work due to a need to stay at home and look after the children. In these circumstances, you should seriously consider low cost straightforward life insurance.
If you are not married but live with someone and own a property together, what do you want to happen? Would you like your partner to inherit all your property including money and insurance policies or would you want to give them just your share of the home and everything else to relatives, other friends or charity.
As of the 9th October 2007 there are two sets of Inheritance Tax Rules.
One set for marrried couples, those in Civil Partnerships, widows and widowers.
Another set for everyone else, single people, divorcees and those who informally live together.
The basic difference is how each individuals IHT free allowance is treated.
Rules and exemptions
Inheritance Tax is chargeable on the property a person leaves on their death. Basically, anything up to £325,000 (2009-2010 tax rates) is Inheritance Tax free. Anything over £325,000 may incur tax at 40%.
By property, we mean any assets including houses, shares, bank accounts, cash etc.
Certain gifts are exempt (i.e. free of Inheritance Tax.) The most important exemptions are property left to surviving husbands, wives or civil partners or gifts to charities.
It is important to remember only married couples and civil partners qualify for the surviving spouse exemption. No one else, whatever the relationship, gets the benefit of this exemption.
Gifts made within seven years of death may also be included in the calculations.
Example (a)
A husband dies with a total estate of £800,000. He leaves £400,000 to his wife and £400,000 to his children.
The gift to the wife is tax free, however much it may be.
Inheritance Tax is payable only on the assets which pass to the children that is £400,000.
The first £325,000 is tax free
Tax is payable on the gift to the children would be £30,000
(£400,000 - £325,000 = £75,000 at 40% = £30,000)
Exemptions
The main exemptions are:
I Spouse exemption
As already mentioned assets left to a husband or wife or to a partner in a Civil Partnership, are exempt. Spouses often leave everything to each other and no tax is payable however much was involved.
From the 9th October 2007, If a widow or widower or the second one in a civil partnership dies after that date then, subject to various conditions, their estate may be able to benefit from two sets of IHT allowances and leave up to £624,000 tax free.
(N.B. for transfers to a non-UK. domicile spouse the exemption is limited to £55,000).
II Annual exemption
(Currently £3000).
Each year an individual can gift up to £3,000 completely free of Inheritance Tax: A married couple can therefore gift £6,000 in one year. If this exemption is unused in any one financial year (5th April ) it can be carried forward but only for one year.
This is a lifetime exemption and therefore not available on death if unused in that year.
III Normal expenditure out of income
Gifts made out of income, which are regular and habitual, are exempt so long as they leave the giver with sufficient income to maintain his or her normal standard of living.
The idea is that you can give away a reasonable amount from your income each year but not your capital or savings. How much is “reasonable” depends on your circumstances. The more income you have the more you can legitimately give away before the Inland Revenue would start to become suspicious.
There is no monetary limit on this exemption so the Inland Revenue is very keen to ensure that it is not abused. For example they would not approve of giving away so much income that the giver had to rely on their savings for their own living expenses.
IV Small gifts exemption
Gifts up to £250 to any one person in any one year are free of IHT. This exemption cannot be used as part of a larger gift to the donee (i.e. the person who receives the gift).
For example gifts of £250 to each of 8 grandchildren will enable £2,000 to be transferred free of IHT; this can be repeated every year.
V Gifts in consideration of marriage
Gifts to the parties of a marriage, which are made before or at the date of a marriage are exempt up to various limits. These depend upon the relationship of the donor (i.e. the person who makes the gift) to the parties of the marriage as follows:
- Parents £5,000
- Grandparents £2,500
- Others £1,000
VI Gifts for maintenance of family
Lifetime gifts for the maintenance, education or training of a child up to the age of 18, or when he or she ceases to undergo full-time education or training, are exempt. Thus, all costs of education of a child are exempt.
Other 'family' gifts can be exempt in particular those for the care or maintenance of a 'dependent relative'. A dependent relative is any relative of the donor or his or her spouse who is incapacitated by old age or infirmity from maintaining him/herself and also includes a mother or mother in-law whether or not incapacitated.
VII Gifts to charities
Unconditional gifts to charities either during lifetime or on death are exempt.
The exemptions mentioned above are the ones which are most likely to be of use in the common family situation.
