Don’t Let the Tax-Tail Wag the Dog
Estate Duty, Capital Transfer Tax and now Inheritance Tax (IHT); some form of death tax has been in existence in the UK since the 19th Century. It is commonly considered to be a complicated tax, so this month we will look at the basic rules that affect most people and next month we will look at some more specialist areas, including lifetime IHT planning and the main reliefs.
Whilst it is possible for Inheritance Tax to be charged on transfers of assets during lifetime, it mostly arises on death.
When someone dies, IHT is charged on the value of their estate. The value of the estate is calculated by adding all of the assets together and deducting any liabilities. In broad terms, the assets will be anything to which the deceased was beneficially entitled, including their own assets, their share of jointly held assets and assets held in trust for them.
Exemptions, allowances and/or reliefs are then applied to give the taxable estate. The tax is levied at 40 per cent, although a lower rate of 36 per cent is available where 10 per cent of the gross estate is left to charity.
So, what is the IHT threshold and what are the main exemptions?
The IHT threshold is currently £325,000 for individuals. This means that if your estate, after you have added together all of your assets and deducted the liabilities, is over £325,000, there could be an IHT bill on your death. IHT is charged at 40 per cent on everything over that amount.
Transfers between spouses/civil partners are exempt from IHT and you can inherit your spouse’s £325,000 allowance provided they have not already used it up (by making gifts to non-exempt beneficiaries or other lifetime gifts etc). Where spouses leave everything to each other, when the survivor dies they can leave up to £650,000 without any IHT being paid.
In 2017 a new allowance was introduced called Residence Nil-Rate Band. This allowance is complex, limited to certain circumstances and inextricably linked to property ownership. If you qualify, you could increase your £325,000 threshold by a further £175,000. You can inherit this additional allowance from your spouse too.
Gifts to charities, some political parties and gifts into trusts for disabled beneficiaries are also exempt from IHT. In addition to this, the Government has recently introduced a new exemption for front-line workers if they die as a result of COVID-19, which was an extension of the exemption for soldiers who die in the line of duty.
An early review of your tax position is something that we would always advise. It is crucial that any IHT or general estate planning advice is tailored to the individual circumstances.
Please pick up the phone and give us a call on 01228 552222 if you want to discuss any aspect of this article.