Inheritance Tax

Inheritance tax (IHT) is a tax that may be due on your estate when you die. It’s quite a complex subject and there are various exemptions and rules to take into consideration. With professional advice and good planning it is possible to considerably reduce, or remove, the amount of IHT due on your estate when you die.

• IHT only applies to the part of the estate that is valued above a set limit. This amount is reviewed each year in the government’s annual budget

• In the tax year 2009/10 IHT is set at £325,000

• Any part of an estate valued at over £325,000 is taxed at 40%

• Any estate valued at less than £325,000 is within the nil rate [tax] band and therefore is not liable for IHT

• Your estate comprises all of your assets (house, car, cash, savings, investments, belongings and any gifts made in the 7 years preceding your death)

• The estate must be valued for IHT purposes. The resultant value must be an accurate reflection of a reasonable market rate at the date of death

• IHT is paid by the executors of an estate within 6 months from the end of the month in which the death occurs. For example, if someone dies on 12th March, IHT is due by 30th September. (IHT due on some assets, including land and buildings, can be paid in instalments over 10 years.)

• If IHT is not paid within 6 months, interest will be charged on the amount due

• Gifts made to registered charities, political parties and some national institutions (eg. the National Trust, national museums and universities) are exempt from IHT

There are also various IHT exemptions as follows:

If you leave your entire estate to your wife/husband or civil partner, and you both live in the UK there is no IHT to pay. However, it is important to remember that when the surviving spouse dies, the estate will be liable for IHT if it is over the nil rate band. With correct planning this is something that can be minimised in a correctly worded Will.

You can leave part or all of your estate to anyone you want and it will not be subject to IHT as long as it is below the nil rate band.

The following gifts are free from IHT if they were given at any time during your lifetime or as a bequest in your Will:

You can give a ‘large gift’ of up to £3,000 to any individual – whether they are related to you or not. If you don’t use this amount in one year, you can carry it forward for the next – but no further. This gift will then not be liable for IHT.

For example:

• In 2008 you didn’t use your annual exemption amount, so, in 2009 you can give someone a gift of £6,000

• You can combine your annual exemption with a wedding/civil partnership gift. This means as a parent you can give your child a gift of up to £11,000

You can also give a wedding or civil partnership gift up to certain values which is also not liable for IHT. The limits for the people who are giving the gifts are as follows:

• Parents – £5,000

• Other relatives – £2,500

• Everyone else – £1,000

You can give a ‘small gift’ of up to £250 to as many people as you want per tax year and they will not be liable for IHT.

Note: small gifts exemption cannot be used with any other exemptions

Gifts made from your net (after tax) income (ie. not capital) are exempt from IHT, including:

• Regular payments to someone, including Christmas, birthdays or wedding/civil partnership or anniversaries presents

• Regular life insurance policy premiums (yours or someone else’s)

Some maintenance payments are also free from IHT, these include payments to:

• Your wife or husband

• A former civil partner or ex-spouse

• Dependent relatives (due to infirmity or old age)

• Any of your children (including adopted children and step-children) under 18 years old or in full-time education

A PET is a gift of any amount that you give to one of the three types of individuals below:

• A gift to another individual

• A trust for a disabled person

• A bereaved minor's trust in relation to a beneficiary of an Interest in Possession (IIP) trust. This PET is most easily explained by an example: Mr & Mrs V have a child. In Mrs V’s Will both Mr V and the child are named as beneficiaries. However, when Mrs V dies, Mr V decides to give up his interest in his wife’s assets and place them in trust for their bereaved child.

For a PET to be free of IHT, you must give and then live for seven years after making the gift. PETs should not be covered in any other gift exemptions described above. A further stipulation is that a PET must be an ‘outright’ gift and cannot have any restrictions laid upon it. For example: if you gift your house to your child but continue to live in it without paying a market value rent, the property will still be considered part of your estate and subject to IHT upon your death if over the nil band rate.