Inheritance tax (IHT) is an issue affecting an increasing number of UK households as house prices rise, and is an important consideration for anyone looking to ensure that their family is provided for through an inherited estate.
When an individual passes away, their estate - composed of all their assets including property and a share of jointly-owned assets - may be subject to inheritance tax. Outstanding debts are first paid from the estate, and then IHT is assessed. The current nil rate band for IHT as at 2012/13 is £325,000 and estates worth below this amount will not incur any tax. Any amount in excess of the nil rate band will be taxed at a 40% rate.
There are several exemptions from inheritance tax:
- A yearly £5,000 gift exemption from a parent. £2,500 for gifts from grandparents. £1,000 for a gift from anyone else.
- Any number of gifts of up to a total of £250 in worth per recipient per tax year.
- Wedding and civil partnership gifts to relatives, with the exempt sum varying depending on the exact relationship.
- Charity and political party donations.
- Spousal exemption - estate inherited by a spouse domiciled in the UK is completely exempt of IHT.
Other gifts are PETs - potentially exempt transfers. Should the donor pass away, the gift is subject to inheritance tax, though the taxation amount is reduced over the course of 7 years. After this period, the gift is fully exempt. Some gifts may be classified as gifts with reservation if the donor is still in a position to benefit from the gifted assets, such as giving a house to children and then continuing to live in the property without paying a market-value rent to the new owners. In such cases, inheritance tax can still be levied on the gift with reservation.
There are some potential methods of further reducing inheritance tax via the use of appropriately set-up trusts, but it is important to take professional advice before undertaking such a venture. Life assurance is another method of reducing the impact of IHT.
By filling out our short online enquiry form, you will be able to take advantage of the FREE, no-obligations initial consultation on offer from the Tax Advisory Service, putting you in contact with professional UK financial consultants who can help with any concerns you may have about whether there will be tax to pay on your estate when you pass away.