inheritance tax
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IntroductionThe aim of this guide is to explain the current tax regime so that you can assess your Inheritance Tax (IHT) position andways of mitigating it.
Inheritance tax – ratesIHT is primarily a charge on an individual’s estate on death, but it can also arise on certain lifetime gifts.
IHT is payable at the rate of 40% on the value of a deceased’s estate above the Nil Rate Band Exemption (currently £325,000).
IHT is payable at the rate of 20% on the value above the Nil Rate Band Exemption on lifetime transfers into most trusts.
However, transfers between spouses are exempt from IHT, provided that both spouses are domiciled in the United Kingdom.
Current lawUnder the current law, if a couple are married (or in a civil partnership), and, on the first death, everything is left outright to the survivor, there will be no IHT to pay as the estate will be able to claim Spouse Exemption.
On the second death the survivor will have their own Nil Rate Band, plus they will have inherited the unused percentage of their deceased spouse or partner’s Nil Rate Band, enabling them, under current legislation, to pass up to £650,000 free of tax upon their death.
Note however that the law does not recognise the expression ’common-law wife’ and people living together do not get this benefit.
The current law – an exampleHarry dies in January 2012 and, on his death, has assets of £500,000. He leaves a gift of £162,500 to his son Jamie, and everything else to his wife Joan. The Nil Rate Band allowance at his death was £325,000.
• No IHT is payable on the assets passing to Joan, because of Spouse exemption• No IHT is payable on the gift to Jamie as it falls within Harry’s Nil Rate Band• Harry has therefore lost 50% of his Nil Rate Band by passing this to Joan, who is exempt from tax
On Joan’s death in September 2012, she has assets in her estate of £700,000. She still has her full Nil Rate Band allowance to use. She leaves everything to Louise.
• Because Harry did not use 50% of his Nil Rate Band when he died, Joan’s executors can claim an additional 50% of the Nil Rate Band amount in force at the date of her death. The amount she can leave free of tax is therefore £487,500. The IHT payable on her death is therefore £85,000 being 40% of £212,500
The importance of making a WillUnder current legislation, if you die, whilst married and with children without making a Will, your spouse may not inherit everything. Instead they will inherit everything you own in your joint names, as well as your personal chattels, a statutory legacy of £250,000 and a life interest over half of the remainder of the estate.
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Factsheet
Inheritance Tax
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This may not be the most tax efficient way of passing on the estate, and could cause complications on the second death. By having a properly drafted Will this could be avoided.
Similarly, if everything passes to the surviving spouse, and they subsequently have to go into a care home, they will be assessed and required by the Local Authority to pay their care fees until they reach a specific limit. This could significantly use up any inheritance that it had been intended would pass to future generations. By taking advice it may be better on the first death for the estate to not pass entirely to the surviving spouse, but into a trust for example, and we can advise on this.
Ways to mitigate your IHT liabilityInheritance Tax can significantly reduce the monies you are able to give to your family and friends on your death. If you wish to reduce your inheritance tax liability we recommend you consider the following:
Have a will prepared by a properly qualified and experienced solicitorWe conduct a full review of your assets and exposure to IHT when undertaking the process of drafting your Will. Therefore, we can ensure your estate passes to your beneficiaries in the most tax efficient way.
Annual exemptionEvery individual can give away up to £3,000 per year free of tax.
Potentially exempt transfersIf you give away more than £3,000 in a tax year there will be no IHT payable if you survive 7 years. If you die within 7 years taper relief is available to reduce the rate of tax payable depending on the number of years survived. It is important to consider making these transfers at the right time in your life to obtain the best chance of maximising Inheritance tax relief.
Regular gifts out of incomeYou can give away surplus income free of tax providing it does not affect your standard of living and you do not top-up your income with capital.
Gifts in Contemplation of MarriageParents can give up to £5,000 each free of IHT and Grandparents £2,500 each when a child or grandchild marries. It is important that the gift is made before the wedding so as to attract this relief
Small giftsYou can give up to a total value of £250 per person for any number of people free of IHT each year
CharitiesGifts to charities are exempt from IHT and can even reduce the level of IHT payable on your estate because if over 10% of your estate is left to charity in your Will then the underlying rate of Inheritance Tax reduces from 40% to 36% .
Taking advice from at Financial AdvisorA financial advisor can advise you on the various investments that can reduce your IHT liability. Advice can also be sought on joint life second death policies. Please note that this does not reduce your IHT liability, rather the aim is to ensure that the policy covers the amount of IHT payable.
At Tees you’ll find an extremely capable team of experienced lawyers who specialise in IHT, for more information or to arrange a free initial consultation contact us on the details opposite.
Bishop’sStortford Cambridge Chelmsford GreatDunmow Northampton SaffronWalden
Planning for the future ensures your assets are dealt with according to your wishes, protecting both you and your family. Plus, knowing everything is in hand allows you to get on and enjoy your life with the peace of mind that everything is in order.
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This Factsheet has been prepared to provide useful information but should not be considered as a substitute for advice on any specific case.Tees Law is a trading name of Stanley Tee LLP regulated by the Solicitors Regulation Authority. Registered in England and Wales number OC327874.
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0800 0131165
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INHERITANCE TAXWILLS, TRUSTS, TAX & PROBATE