Independent Options Guide to Inheritance Tax
Death duties have been with us for centuries – once
called Estate Duty, then Capital transfer Tax and now Inheritance
Tax (IHT).
Irrespective of the name, the purpose has always been the
same – to raise revenue from estates.
IHT no longer only affects the wealthy – with house
prices showing a dramatic rise in the last few years, many
more people will now be drawn into the “net”.
An Estate can include the family home or a share of it, all
your bank accounts, building society accounts, your investments
including Income Tax and Capital Gains Tax free products such
as ISA`s, life policies not in trust, your
jewellery, furniture, pictures, your time share in Tenerife,
your car - i.e. with a few exceptions all your assets wherever
situated.
Exemptions
The Nil Rate Band
Thankfully there are exemptions and the first and most important
one is: the first £325,000 of an individual’s
estate (for 2011/12) is taxed at 0% and is not therefore liable
to IHT. This is known as the Nil Rate Band.
The entire estate in excess of this figure is taxed at 40%.
Note: The Nil Rate Band exemption is applicable to everyone
– i.e. in the case of a married couple both parties
are entitled to the exemption.
The Spouse Exemption
No IHT is payable on assets passing during lifetime or on
death from one spouse to another – there is no limit
to this exemption. This assumes the spouse is UK domiciled.
From 5th December 2005, when the Civil Partnership Act came into effect, civil partners are entitled to the same tax rights as married couples. Note that there is no such right for heterosexual couples living together. For IHT purposes therefore, Civil Partners will receive a “Spousal Exemption”.
ENSURE THAT YOUR WILL IS UP TO DATE as there are opportunities
for IHT planning with this very valuable exemption.
Using the Balance of the Nil Rate Band of Former Spouse or Civil Partner
Where an individual dies after 08/10/2007, he or she may also be entitled to an additional nil rate band based upon the proportion of his or her spouse’s nil rate band which remained unused on the earlier death of that spouse or civil partner. The additional relief has to be claimed.
Annual Exemption and Small Gifts
Gifts of up to £3000 per tax year are exempt.
This exemption is per person and if not used in any tax year
can be carried forward for use in one subsequent year only.
An unlimited amount of smaller gifts – worth £250
or less – can also be made to any number of people,
however, not to the same person who has benefited from the
annual exemption.
Normal Expenditure out of Income
Regular gifts by an individual that are made out of income
are exempt.
Gifts using this exemption should not affect the donor’s
standard of living and should be a regular pattern of spending
– the gift does not need to be made to the same person.
If you have income surplus to your needs and do not need to
sell any capital assets, then this is a very valuable tax
planning opportunity.
Gifts for the Maintenance of a Dependent
A gift of capital designed to maintain a dependent is exempt,
provided payment is for:
 The maintenance of a spouse or former spouse
The maintenance or education of a dependent child
or stepchild under the age of 18 (or over 18 if in full time
education.)
Reasonable provision for the care or maintenance
of a dependent relative who is unable to maintain him or herself
due to disability of infirmity.
Gifts in Consideration of Marriage
The parents of the bride and groom can each give up to £5000
to the parties to the marriage. In addition the grandparents
may each give a sum of up to £2500. Anyone else may
give £1000.
Gifts to Recognised Charities and Other Bodies
Gifts to charities, political parties or gifts for the public
benefit, e.g., universities, national museums, the National
trust etc are also exempt.
Potentially Exempt Transfers
These are outright gifts made during the donor’s lifetime
to individual or certain types of trusts. No tax will be payable
when the gift is made since it is treated as exempt and remains
so provided the donor survives at least seven years following
the date of the gift.
Should death occur between years three and seven, IHT may
become payable but at a tapered rate.
In all cases however, any increase in value from the date
of the gift will be free from IHT – it is the actual
date of the gift that counts.
Chargeable Lifetime Transfers
These are gifts that do not qualify as being exempt or potentially
exempt, the most common example of which is a gift into a
discretionary trust.
Although chargeable, tax will only become due at a rate of
50% of the death rates (i.e. 20%), where the value of the
transfer, when added to other chargeable lifetime transfers,
exceeds the nil rate band and any other available exemptions.
Trusts
If the recipient of a gift is young or insufficiently responsible,
the donor may wish to make the gift but keep control over
it either until the beneficiary reaches a certain age, or
until the donor decides the recipient is sufficiently mature,
a suitable trust can be used. Further reasons for a trust
might include:
Provision of monies for successive generations
Preservation of monies which could be diluted due
to divorce
Income Tax or Capital Gains Tax mitigation
Mitigation of IHT
Will Trusts incorporating the discretionary trust
to use both spouse exemptions, some times incorporating the
family home
Trusts are a fundamental part of IHT planning.
Lifetime Gifts
Beware of three important issues, which must not be overlooked
when considering making lifetime gifts:
Gifts with Reservation of Benefit
Where an individual makes a gift but continues to enjoy the
benefit - for example, an income from that gift, the gift
with reservation of benefit rules will apply resulting in
no IHT savings have been made. If you make a gift it must
be outright with no strings attached.
Capital Gains Tax
This tax is often forgotten in IHT planning. A gift is a disposal
for capital gains tax (“CGT”) purposes. When the
gift is between connected persons, such as parents to children,
the parents are treated as having received full market value.
If a grandparent wanted to give say 2000 Shell shares to his
grandchild, these shares would be valued at the date of the
gift and CGT could be payable depending on the Grandparent’s
personal tax circumstances so there are two taxes to consider
– IHT and CGT. The CGT can be considerable in the case
of property. Not all assets are chargeable to CGT.
Pre-Owned Assets Tax
The Finance Act 2004 introduced a new INCOME TAX charge, called
preowned assets tax (POAT) which broadly applies to the continued
use of previously owned assets. This new tax is based on the
value of the asset or in the case of property on its rental
value where this is in excess of £5000.
Summary
There are other relief and many other pitfalls, too numerous
to mention in an introduction to IHT. Before any planning
is undertaken:
Make sure you have a Will – or revisit your
Will
Be realistic – do not make tax savings your
prime consideration – IHT planning is all about passing
your worldly wealth to your chosen beneficiaries rather than
to the Inland Revenue
Make sure your arrangements are flexible and can adapt to
changes in your circumstances.
NOTE: The above is intended as a general guide for
your information. It is NOT intended as a substitute for proper
legal advice. Each case is different and advice cannot be
given without a proper analysis of your own circumstances
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