Inheritance Tax

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A. What is it?

Inheritance Tax (“IHT”) is payable on taxable estates of deceased persons and on gifts made during a person’s lifetime.  The amount below which an estate is not taxable (often called “the nil rate band”) has been increased each year but has now been set indefinitely as follows:-

Death between 6th April 2008 until 5 April 2009  - £312,000
Death between 6th April 2009 until 5 April 2010  - £325,000
Death on or after 6th April 2010 onwards   - £325,000

In so far as an estate exceeds these amounts when a person dies inheritance tax will be levied at 40% on the value in excess of the values shown above but there are exemptions and reliefs which reduce or eliminate the tax depending on the circumstances.

The tax is payable upon a “transfer of value” which is defined to include:-

(i) The value of a tax payer’s estate at death;

(ii) The value of the estate will include an appropriate proportion of jointly owned property and may include any trust assets in which the deceased tax payer had an interest;

(iii) The value of gifts of assets made within the last seven years before death will be added back into the value of the estate for the purposes of assessing liability to tax.

B. Exemptions

There are a number of important exceptions from Inheritance Tax as follows (although this is not an exclusive list):-

B.1 Gifts during lifetime and on death between spouses and civil partners are exempt.
A couple living together who are not married and are not civil partners could be well advised from an inheritance tax point of view to either get married or become registered civil partners so that should either die any assets inherited by the survivor will be free of inheritance tax.  Otherwise inheritance tax will be payable and this can cause considerable difficulty for example where a house or a share in the house passes from one to the other without the benefit of the exemption afforded by marriage or civil partnership.  It may be necessary to sell the house in order to pay the tax.

B.2 If a spouse or civil partner dies leaving a surviving spouse or civil partner but without using the nil rate band for giving property to other people i.e. not to the surviving spouse or civil partner, then when the surviving spouse or civil partner in turn dies a double nil rate band will be available.  So for example if a husband dies leaving £450,000 to his widow and then his widow dies leaving an estate of £600,000 (comprising £450,000 inherited from her husband and £150,000 of her own savings) the widow’s estate will at current rates have a double nil rate band of £650,000 (i.e. £325,000 x 2) available so that none of her estate will be subject to inheritance tax.  This relief is called “the transferable nil rate band” because it operates by the transfer of the benefit of the nil rate band of the first spouse or civil partner to die to the second spouse or civil partner to die.

B.3 Gifts to charities (whether registered with the Charity Commissioners or not) without limit.  These gifts will be exempt whether made while the donor is alive or on death by Will.  This can save inheritance tax dramatically.  For example, a person has an estate of £450,000 and he has friends and relatives whom he would like to benefit but no surviving spouse or children of his own.  His prospective inheritance tax charge at current rates will be £50,000.  He does not want this tax charge to be paid.  Instead he wants to benefit charities.  He therefore provides in his Will that £325,000 will be distributed to his family and the rest will be distributed to charities.  There will be no inheritance tax charge as a result.

B.4 Gifts to established political parties without limit.  These gifts will be exempt whether made while the donor is alive or on death by Will

B.5 Up to £3,000 of gifts in any one financial year ie from 6th April to 5th April in the following year and if all of this is not given away in one year the balance can be added to next year’s gift allowance but an unused balance can only be carried forward for one year.  After that it is lost.  This allowance is made to each individual and so in the case of spouses or civil partners each of the spouses and each of the civil partners is entitled to this allowance making £6,000 per annum together.

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