Inheritance Tax Planning
Inheritance Tax (IHT) is simply a tax on the money or possessions you leave behind when you die. It also applies to some gifts you may make while you are still alive. A certain amount can be passed to your inheritors without being taxed; this is known as your ‘tax-free allowance’. The allowance or ‘threshold’ for 2013-2014 has been frozen at £325,000, the same as it has been since 2010-11. It will stay that way until at least 2017 as the government tries to rebuild its finances following the credit crisis.
You can make certain gifts during your lifetime or in your will that are also tax-free. This is an important part of inheritance tax planning.
Who pays the bill?
Inheritance tax due on money or possessions left when you die is paid from your estate (except in rare circumstances). Your estate comprises everything you own (money, property and investments), minus everything you owe (mortgage, loans, credit card bills) at the time of your death (including funeral expenses).
If you have made any gifts during the seven years before your death, the recipients of those gifts must pay the inheritance tax due. If they refuse to pay – or are unable to – the tax due is paid by your estate.
Thresholds and tax rate
If you are single and die leaving an estate worth over £325,000, then 40% tax is due on anything above £325,000. For example, if you leave an estate worth £600,000 (quite possible in the South of England where property prices are higher than average) then the tax bill will be £600,000 minus the threshold (£325,000) = £275,000 which is taxed at 40% = a liability of £110,000 that has to be paid to HMRC prior to the estate being distributed to the beneficiaries.
If you are married or in a civil partnership, the rules are slightly different. Married couples and civil partners are allowed to pass their money and possessions to each other tax-free. Since October 2007, the surviving partner can use both tax-free allowances (currently £650,000).
This calculator (a link to the ‘This Is Money’ website) is handy way of working out your approximate inheritance tax (IHT) liability. But it doesn’t show you how to use financial planning to mitigate the ultimate tax bill your estate will have to pay. You need an independent financial advisor for that. Link to Calculator
Exemptions
- Charity exemption. Any gifts you make to a qualifying charity (during your lifetime or in your Will) will be exempt from Inheritance Tax. A donation to charity in your Will may also reduce the rate at which tax is paid.
- Potentially Exempt Transfers (PETs). If you survive for seven years after making a gift to someone, the gift is generally exempt from Inheritance Tax, no matter what the value.
- Annual exemption. You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount. You can also use your unused allowance from the previous year but you must use the current year’s allowance first.
- Small Gift exemption. You can make small gifts of up to £250 to as many individuals as you like tax-free.
- Wedding and civil partnership gifts. Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief. If the deceased owned a business, farm, woodland or National Heritage property, some relief from Inheritance Tax may be available.
Next steps
If you feel that inheritance tax (IHT) planning is something that you or your family need, you should make sure that you consult an expert in the field. As you can see from the notes above, there are a number of pitfalls and complexities. If you would like to find out more about the financial decisions you should take now to reduce a possible IHT bill, please contact Marchwood IFA.