Capital
Taxes
Inheritance
Tax
Inheritance
tax (IHT) is levied on a person’s estate when they die,
and certain gifts made during an individual’s lifetime.
Most gifts made more than seven years before death will escape
tax. Therefore, if you plan in advance, gifts can be made
tax-free: the result can be a substantial tax saving.
We give guidance below on some of the main opportunities for
minimising the impact of the tax.
It is however important for you to seek specific professional
advice appropriate to your personal circumstances.
Summary
of IHT
Scope
of the tax
When a person dies IHT becomes due on their estate. Some lifetime
gifts are treated as chargeable transfers but most are ignored
providing the donor survives for seven years after the gift.
The rate of tax on death is 40% and 20% on lifetime chargeable
transfers. The first £263,000 is not chargeable.
IHT on lifetime gifts
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Lifetime
gifts fall into one of three categories:
- a
transfer to a company or a discretionary trust is
immediately chargeable
- exempt
gifts will be ignored both when they are made and
also on the subsequent death of the donor
- any
other transfers will be potentially exempt transfers
(PETs) and IHT is only due if the donor dies within
seven years. It might therefore be more accurate to
regard them as potentially chargeable transfers.
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IHT
on death
The main IHT charge is likely to arise on death. IHT is charged
on the value of the estate. This includes any interests in
trust property where the deceased had a right to income from,
or use of, the property. Furthermore:
- PETs
made within seven years become chargeable
- there
may be an additional liability because of chargeable transfers
made within the previous seven years.
Estate
planning
Much estate planning involves making lifetime transfers to
utilise exemptions and reliefs or to benefit from a lower
rate of tax on lifetime transfers.
However careful consideration needs to be given to other factors.
For example a gift that saves IHT may unnecessarily create
a capital gains tax (CGT) liability. Furthermore the prospect
of saving IHT should not be allowed to jeopardise the financial
security of those involved.
Use of PETs
Wherever possible gifts should be made as PETs rather than
as chargeable transfers. This is because the gift will be
exempt from IHT if the donor survives for seven years.
Nil rate band and seven year cumulation
Chargeable transfers covered by the nil rate band can be made
without incurring any IHT liability. Once seven years have
elapsed a gift is no longer taken into account in determining
IHT on subsequent transfers. Therefore every seven years a
full nil rate band will be available to pass assets out of
the estate.
Annual exemption
£3,000 per annum may be given by an individual without
an IHT charge. An annual exemption may be carried forward
to the next year but not thereafter.
Gifts between husband and wife
Gifts between husband and wife are generally exempt. It may
be desirable to use the spouse exemption to transfer assets
to ensure that both spouses can make full use of lifetime
exemptions, the nil rate band and PETs.
Small gifts
Gifts to individuals not exceeding £250 in total per
tax year per recipient are exempt. The exemption cannot be
used to cover part of a larger gift.
Normal expenditure out of income
Gifts which are made out of income which are typical and habitual
and do not result in a fall in the standard of living of the
donor are exempt. Payments under deed of covenant and the
payment of annual premiums on life insurance policies would
usually fall within this exemption.
Family maintenance
A gift for family maintenance does not give rise to an IHT
charge. This would include the transfer of property made on
divorce under a court order, gifts for the education of children
or maintenance of a dependent relative.
Wedding presents
Gifts in consideration of marriage are exempt up to £5,000
if made by a parent with lower limits for other donors.
Gifts to charities
Gifts to registered charities are exempt provided that the
gift becomes the property of the charity or is held for charitable
purposes.
Business property relief
When ‘business property’ is transferred there is
a percentage reduction in the value of the transfer. Often
this provides full relief. In cases where full relief is available
there is little incentive, from a tax point of view, to transfer
such assets in lifetime. Additionally no CGT will be payable
where the asset is included in the estate on death. However
the reliefs may not be so generous in the future and therefore
gifts now may be advisable.
Use of trusts
Trusts can provide an effective means of transferring assets
out of an estate whilst still allowing flexibility in the
ultimate destination and/or permitting the donor to retain
some control over the assets. Provided that the donor does
not obtain any benefit or enjoyment from the trust, the property
is removed from the estate.
We can advise you on the type of trust which may be suitable
for your circumstances.
Life assurance
Life assurance arrangements can be used as a means of removing
value from an estate and also as a method of funding IHT liabilities.
A policy can also be arranged to cover IHT due on death. It
is particularly useful in providing funds to meet an IHT liability
where the assets are not easily realised, eg family company
shares.
Wills
As the main IHT liability is likely to arise on death, a sensible
and up to date Will is important.
How
We Can Help
Whilst
some generalisations can be made about IHT planning it is
always necessary to tailor the strategy to fit your situation.
Any plan must take account of your circumstances and aspirations.
The need to ensure your financial security (and your family’s)
cannot be ignored. If you propose to make gifts the interaction
of IHT with other taxes needs to be considered carefully.
However there can be scope for substantial savings which may
be missed unless professional advice is sought as to the appropriate
course of action. We would welcome the opportunity to assist
you in formulating a strategy suitable for your own requirements.
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of page
For information of users: This material is published
for the information of clients. It provides only an overview
of the regulations in force at the date of publication, and
no action should be taken without consulting the detailed
legislation or seeking professional advice. Therefore no responsibility
for loss occasioned by any person acting or refraining from
action as a result of the material can be accepted by the
authors or the firm.
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