My accountinheritance tax
- What is inheritance tax?
- Will Prob8 sort all this out for me?
- Who pays inheritance tax?
- What is the tax rate?
- Is it true that married couples can now leave their nil-rate band to each other?
- How do I get the nil-rate band transferred?
- Who pays the inheritance tax?
- What must I do to find out if inheritance tax is payable?
- When must the tax be paid?
- Are any beneficiaries exempt from the tax?
- Are any gifts exempt from the tax?
- What about other lifetime gifts not mentioned above?
What is inheritance tax?
Inheritance tax is the tax that is paid on your 'estate'. Broadly speaking this is everything you own at the time of your death, less what you owe. It's also sometimes payable on assets you may have given away during your lifetime. Assets include things like property, possessions, money and investments.
Will Prob8 sort all this out for me?
Absolutely. We are well used to valuing estates for tax purposes, filling out the lengthy Revenue & Customs forms, claiming the nil-rate band transfer for married couples, calculating and paying the tax liability and perhaps most importantly of all, advising on what steps might be possible in individual circumstances to reduce and in some cases eradicate the tax liability altogether.
Who pays inheritance tax?
Not everyone pays inheritance tax on death. It only applies if the taxable value of your estate (including your share of any jointly owned assets and assets held in some types of trusts) when you die is above £325,000 (2009-2010 tax year). It is only payable on the excess above this nil rate band.
There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any inheritance tax being due, for example:
- If your estate passes to your husband, wife or civil partner and you are both domiciled in the UK there is no inheritance tax to pay even if it's above the £325,000 nil rate band
- Most gifts made more than seven years before your death are exempt
- Certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000 (depending on the relationship between the giver and the recipient), gifts to charity, and £3,000 given away each year are also exempt
What is the tax rate?
Inheritance tax is charged at the following rates on death:
| Net taxable estate | Tax rate |
|---|---|
| £0 – £325,000 | 0% (this is known as the nil-rate band) |
| £325,001 + | 40% |
Is it true that married couples can now leave their nil-rate band to each other?
Yes it is. Where one party to a marriage or civil partnership dies and does not use their nil rate band to make tax free bequests to other members of the family, the unused amount can be transferred and used by the survivor’s estate on their death. This only applies where the survivor died on or after 9 October 2007.
In effect, spouses and civil partners between them now have a nil rate band that is worth up to double the amount of the nil rate band that applies on the survivor’s death.
For example, if on the death of the first spouse, they leave legacies of £32,5000 to each of 4 children, the sum of £130,000 would be chargeable to IHT. However, because this is below £325,000, the legacies pass free of tax and £195,000 (or 60%) of the nil rate band is unused. This unused amount can be transferred to the estate of the survivor. If the nil rate band is say £400,000 when the survivor dies, the inheritance tax nil-rate band for the surviving spouse would be increased by 60% to £640,000.
How do I get the nil-rate band transferred?
In order to be given the transfer, the personal representatives (the person nominated to handle the affairs of the deceased person) of the second spouse to die must make a claim for the transfer within 2 years of the second death. There is an application form which must be submitted with the other tax papers and this is reviewed by HM Revenue & Customs. Assuming the claim is accepted, the extra nil-rate band will then be applied to the inheritance tax calculation.
Who pays the inheritance tax?
The personal representative (the person nominated to handle the affairs of the deceased person) arranges to pay any inheritance tax that is due.
What must I do to find out if inheritance tax is payable?
It is necessary to value all of the assets and liabilities (including joint ones) that the deceased person owned. The valuation of assets must accurately reflect what they would reasonably fetch in the open market at the date of death.
When must the tax be paid?
In most cases, inheritance tax must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing.
Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years.
Are any beneficiaries exempt from the tax?
Thankfully yes. Gifts can be made to certain people and organisations without having to pay any tax. These gifts, which are exempt whether they are made during your lifetime or in your will, include gifts to:
- A spouse or civil partner, even if you're legally separated (but not if you've divorced or the civil partnership has dissolved), as long as you both have a permanent home in the UK
- UK charities
- Some national institutions, including national museums, universities and the National Trust, and
- UK political parties
Are any gifts exempt from the tax?
Again, thankfully yes. Some gifts are exempt because of the type of gift or the reason for making it. These include:
Wedding or civil partnership ceremony gifts (to either of the couple) are exempt from inheritance tax up to certain amounts:
- Parents can each give £5,000
- Grandparents and other relatives can each give £2,500
- Anyone else can give £1,000
You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If it is called off and you still make the gift, this exemption won't apply.
You can make small gifts, up to the value of £250, to as many people as you like in any one tax year (6 April to the following 5 April) without them being liable for inheritance tax. But you can't give a larger sum: £500, for example, and claim exemption for the first £250. And you can't use this exemption with any other exemption when giving to the same person. In other words, you can't combine a 'small gifts exemption' with a 'wedding/civil partnership ceremony gift exemption' and give one of your children £5,250 when they get married or form a civil partnership.
You can give away £3,000 in each tax year without paying inheritance tax. You can carry forward all or any part of the £3,000 exemption you don't use to the next year but no further. This means you could give away up to £6,000 in any one year if you hadn't used any of your exemption from the year before.
You can't use your 'annual exemption' and your 'small gifts exemption' together to give someone £3,250. But you can use your 'annual exemption' with any other exemption, such as the ' wedding/civil partnership ceremony gift exemption'. So, if one of your children marries or forms a civil partnership you can give them £5,000 under the wedding/civil partnership gift exemption and £3,000 under the annual exemption - a total of £8,000.
Any gifts you make out of your after-tax income (but not your capital) are exempt from inheritance tax if they're part of your regular expenditure. This includes:
- Monthly or other regular payments to someone, including gifts for Christmas, birthdays or wedding/civil partnership anniversaries
- Regular premiums on a life insurance policy (for you or someone else)
You can also make tax-free maintenance payments to:
- Your husband or wife
- Your ex-spouse or former civil partner
- Relatives who are dependent on you because of old age or infirmity, and
- Your children (including adopted children and step-children) who are under 18 or in full-time education.
What about other lifetime gifts not mentioned above?
If you make a gift in any of the situations described below and it isn't covered by one of the exemptions already described, it is known as a 'potentially exempt transfer' (PET). A PET is only free of inheritance tax if you live for seven years after you make the gift.
Gifts that count as a PET are gifts made to:
- Another individual
- A trust for someone who is disabled, and
- A bereaved minor's trust where, as the beneficiary of an Interest In Possession (IIP) trust (with an immediate entitlement following the death of the person who set up the trust), you decide to give up the right to receive anything from that trust or that right comes to an end for any other reason during your lifetime.
If you make a gift with strings attached (technically known as a 'gift with reservation of benefit'), it will still count as part of your estate, no matter how long you live after making it. For example, if you give your house to your children and carry on living there without paying them a full commercial rent, the value of your house will still be liable for inheritance tax.
In some circumstances a gift with strings attached might give rise to an Income Tax charge on the donor based on the value of the benefit they retain. In this case the donor can choose whether to pay the Income Tax or have the gift treated as a gift with reservation.
Source: Crown Copyright Direct.gov.uk