What is Inheritance Tax (IHT)?
Inheritance tax, or IHT as it is commonly known, is payable on everything you have of value when you die, including your home, jewellery, savings and investments, works of art, cars and any other properties or land – even if they are overseas. It’s usually payable on death. When you die your assets become known as your estate.
The current (2009/10 tax year) nil-rate threshold is £325,000. This means that tax will be payable on the amount of your estate that exceeds the nil-rate threshold. The threshold rises each year and will reach £350,000 in the 2010/11 tax year.
Transfers between spouses or civil partners are exempt from IHT. The exception is if your spouse or civil partner is domiciled outside the
Your executors or legal personal representatives typically have six months from the end of the month of death to pay any IHT due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares, where the IHT can be paid in installments. Then your beneficiaries have up to 10 years to pay the tax owing, plus interest. Interest is currently charged at 0% from 24 March 2009 on instalments or late payments. If you pay by instalments you must pay a tenth of the amount of tax owed each year for 10 years
So what can and should you do?
While the simple answer is to give all your assets away before you die this may not always be the most prudent and tax efficient way. Here are a few tips for you to consider, but take professional guidance before taking any action and call Mortgage Masters UK on 01865 744299 or fill out our Enquiry Form.
There are several exemptions to IHT, which include:
- Annual gift of £3,000 - You can give away up to £3,000 worth of gifts every year to whoever you like, and if you can afford to do so, you should try and use this exemption every year.
- Gifts out of income - regular gifts out of surplus income, as opposed to capital, are exempt from IHT. This is a little used, but quite useful exemption, but gifts do need to be regular.
- Small gifts of up to £250 - This is £250 per person, but it cannot be the same person you gave the £3,000 annual gift to. Useful if you have plenty of cash and several grandchildren.
- Gifts on marriage - You can give £5,000 to your own child on their getting married, £2,500 to your grandchild and £1,000 to anyone else. Only applies to one marriage per person unfortunately.
- Gifts to charities - Any gifts to charities are exempt from IHT
You should also consider using trusts to avoid paying IHT. Please refer to our Trusts page on this website for more information.
There are also currently what are called Potentially Exempt Transfers (PETs). Most gifts in excess of the exemptions given above made during your lifetime are exempt at the time that they are made, but are subject to your surviving for seven years after the gift was made. Where the total amount of gifts within seven years of death plus the value of your estate exceeds the nil-rate threshold, IHT is payable at 40% on the amount exceeding the threshold – although some gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of IHT payable. Here is a table which details the reduction in IHT on gifts made within 7 years of death.
Year Between Gift and Death Percentage of Full Charge
0-3 100%
3-4 80%
4-5 60%
5-6 40%
6-7 20%
One of the most important things you can do to help reduce the amount of IHT you’ll have to pay, is write a will. If you die without a will, your estate is divided out according to a pre-set formula and you have no say over who gets what and how much tax is payable.
IHT can be complicated and no one likes to think about their own mortality, so it is a subject that is easy to avoid. But a little financial planning now can mean that your family and friends get your money when you die, not the Chancellor.
Read more about this subject on our page dedicated to Writing Wills.
