INTRODUCTION
Inheritance Tax is covered by the Inheritance Tax Act 1984. It is effectively a death tax payable on peoples’ estates. The first £325,000 (as at April 2009) comes within the nil rate band, which is not taxable. Any balance is then taxed at the rate of 40%. Generally speaking, there are a number of things that can be done to try and reduce, if not avoid, the payment of inheritance tax. However, it is quite a complicated area of law and needs some very careful thought and planning.
WHAT SHOULD I DO?
You must work out how much you are worth. Remember, most people are worth far more then they realise. Even if you feel you are under the Nil Rate Band threshold today, it may be that the value of your estate will soar over the coming years. You may inherit from your parents, or from other people, so you should start planning sooner rather then later. You should seek to remove as much from your estate as possible. The less there is in the estate the less IHT will be payable. We can explain how this is possible without negatively affecting your standard of living while you are still able to enjoy it for yourself. We can advise on a whole range of measures that can be taken to save and avoid paying inheritance tax.
SPOUSE EXEMPTION
If a married couple with children wanted to leave the whole of their estate to each other, then they would find that there would not be any tax payable on the first death. This is by virtue of there being a “spouse exemption”. Any money transferred between husband and wife is not taxable and is exempt. It is therefore on the second death that the assets are transferred to the children and others, and a tax bill can potentially arise.
NIL RATE BAND GIFTS
A common arrangement to reduce or avoid paying Inheritance Tax is not to leave everything to the spouse but instead to set up a trust and leave a gift or a loan to say, the children or other beneficiaries, of a sum equivalent of up to the value of the Inheritance Tax Nil Rate Band (up to £325,000) and the balance of the estate to the spouse. With this arrangement there would be no Inheritance Tax bill because the first £325,000 is exempt under the Nil Rate Band and the balance would be Spouse Exempt. However, a balance needs to be struck between the amount to gift or loan to the children or other beneficiaries (to save tax) against the priority of making sure that the surviving spouse has enough assets and money to live on.
TRANSFER OF NIL RATE BAND
The nil rate band – currently £325,000.00 per individual is transferable. The estate of a surviving spouse or civil partner is able to benefit from any unused inheritance tax nil rate band of their deceased spouse or partner. This will apply on the death of a surviving spouse or partner after 8 October 2007, regardless of when the first death occurred.The amountof the nil rate band available for transfer will be based on the proportion of the nil rate band that was unused when the first spouse or partner died. The unused proportion will be applied to the amount of the nil rate band in force at the date of the surviving spouse or partner’s death.For example, Mr A dies today leaving his children £100,000 (i.e. one third of the current nil rate band) with the rest of his estate passing to his wife. On Mrs A’s subsequent death, her nil rate band will then be increased by two thirds. So, if the nil rate band at the time of Mrs A’s death is £360,000, she will be able to leave £600,000 free of inheritance tax, i.e. £360,000 plus £240,000 (two thirds of £360,000).
If a person marries more than once, the nil rate band of the survivor can only be increased by a maximum of 100%.
ANNUAL EXEMPTION
Another way of reducing the Inheritance Tax bill would be to make use of what is known as either the annual exemption of £3,000 per year for each individual. This is effectively what you can give away each year, knowing that in the event of death, then the amounts up to that total will not be taxable. If the £3,000 exemption is not used in one tax year, it can be carried forward to the next year, allowing you to give away £6,000 the following year.
POTENTIALLY EXEMPT TRANSFERS
For a gift to be exempt from IHT the person making the gift must live for more than seven years from the date of the gift. Otherwise, some IHT is payable. The tax payable on the gift reduces on a sliding scale only if it was made between three and seven years prior to death. After the third year the tax paid on an IHT liability such as this, reduces to 32%. It then continues to taper by 8% each year for the seven year period. If the person making the gift dies before three years have elapsed, no IHT benefits are gained at all and the full tax amount is payable.
MARRIAGE GIFTS EXEMPTION
Certain people are allowed to make cash gifts of varying amounts to somebody getting married. A parent can give up to £5,000 to each of their children, including step-children and adopted children; up to £2,500 to a grandchild or children and up to £1,000 to anybody else.
SMALL GIFTS EXEMPTION
Each year you can give away £250 to any number of people without an IHT liability arising.
NORMAL EXPENDITURE FROM INCOME
You can give away any amount of money from your normal income as long as the payments are made on a regular basis, into somebody’s savings account, for example. Essentially, you are giving away money instead of saving it for yourself. However, the gifts must not be so large as to diminish your usual standard of living.
OTHER EXEMPTIONS
You may also give assets to the following organisations during your lifetime or upon your death without Inheritance Tax being payable:
* Gifts to charities
* Donations to political parties
* Gifts to national museums, universities and the National Trust
* Donations of National Heritage property to certain non-profit making bodies
* Gifts of land to registered housing associations
HOW MANY GIFTS CAN I MAKE?
You can make gifts under more than one of the above headings to the same person. For example, if your child is getting married, you could give £5,000 as a wedding gift and £3,000 as another gift and they would both be exempt.
NON-BUSINESS ASSETS RELIEF
These include shareholding and investments in unquoted companies, including certain stocks listed on the Alternative Investment Market. These are free of IHT if you hold them for at least two years.
BUSINESS PROPERTY RELIEF
Most types of business can qualify for business property relief. The only restrictions are for businesses whose main activity is dealing in stocks and shares, land, buildings or various other investments.
The extent of the relief will depend on the type of company involved. If you operate your business as a sole trader or a partner in a partnership you should qualify for 100% relief, meaning your business assets are disregarded for IHT.
A lower 50% rate of business relief applies to a controlling holding in a fully quoted company. This applies to people who have control of the majority of voting powers on all questions affecting the company.
AGRICULTURAL LAND
Any farmland or forestry owned by working farmers can be left without any IHT liabilities as long as it has been owned for at least two years. If the farmland or buildings have been let, they are treated as Potentially Exempt Transfers and you must survive for seven years in order for the property to be passed tax free.
WRITTEN INTO TRUST
It may well be that there are some Insurance or Life policies or Pensions that can be “written into trust” and then they would not be added into an estate and would be exempt when calculating the inheritance tax.
POLICY COVER
“Another way of dealing with any potential inheritance tax bill would be to speak to ourselves and we can put you in touch with a specialist independent financial adviser who can advise you on ways of making provision to protect your assets and property against a future inheritance tax bill. One way of doing this would be to take out a joint whole of life second death policy written in an appropriate trust for your heirs which could pay out a sum assured equal to an expected IHT liability when the second spouse dies. Premiums are normally paid monthly or yearly for as long as you live. The trust structure set up could mean that beneficiaries could obtain the proceeds on day one rather than having to wait up to six months for a Grant of Probate.
