Inheritance Tax
Inheritance Tax is a compulsory tax if the value of your estate is above the nil rate band, with forward planning though, the tax liability may be substantially reduced or possibly even removed completely.
Out of all the taxes regimes this is the one that seems to hurt the most, before the recent rise in property values it was always seen as a tax for the wealthy.
Inheritance Tax was introduced with effect from 18 March 1986. Before this date other estate taxes (Capital Transfer Tax and Estate Duty) applied.
Inheritance Tax is a tax payable on the worldwide assets of any UK domiciled individual on their death and can also be charged on life-time gifts into some trusts. There are currently three rates of inheritance tax; 40% on death, 20% on life-time gifts/transfers over the current nil-rate band (tax free allowance) and 0% on assets up to the nil-rate band.
The current nil rate band for the financial year 2009/10 is £325,000 per person.
There are a number of exemptions and allowances:-
- Transfer of any part of a deceased spouse’s/civil partner’s nil-rate band, not utilised at the time of their death. Application is made for this transfer only on the death of the surviving spouse/civil partner. Any part of the nil-rate band not utilised after the death of the first spouse/civil partner will receive a free uplift to the current nil-rate band rate.
- Generally, transfers between spouses/civil partners are exempt from inheritance tax (this is not the case with non-UK domicile spouses/civil partners where the nil rate band is set on the first £55,000 on their UK assets only).
- The first £325,000 of UK domiciled persons estates are exempt from inheritance tax.
- Each individual has an annual allowance of £3,000 per annum enabling them to make gifts each tax year. If the previous year’s gift allowance has not been used it may be carried forward to the existing tax year i.e. gifts of £6,000 may be made every two years. The annual allowance cannot be rolled up any further than one year. It is not possible to roll up say 5 years allowance and make one gift of £15,000.
- Small gift allowance of £250 which can be made to as many individuals as is required but cannot be added to the annual gift allowance (i.e. one individual cannot be gifted £3,000 and £250 in one tax year and have it all treated as exempt).
- Gifts on consideration of marriage are exempt up to the following limits:-
£5,000 to one’s children
£2,500 to one’s grandchildren
£1,000 to anyone else
- Taper Relief
Taper relief works by reducing the amount of tax payable on chargeable lifetime transfers where the donor of the gift has survived the gift by at least three years. Taper relief only applies to gifts in excess of the nil-rate band made between three and seven years before death.
Taper relief available:-
Less than 3 years None
3 – 4 years 20%
4 – 5 years 40%
5 – 6 years 60%
6 – 7 years 80%
N.B. Taper relief can only reduce the inheritance tax liability due on an estate. It does not reduce the value of the gift itself.
Inheritance tax due on life-time gifts can, in certain circumstances, become the responsibility of the recipient of the gift.
The Financial Services Authority does not regulate some forms of buy to lets, commercial mortgages, tax advice, trusts or redundancy counselling.
