Historically Inheritance Tax was something that only the very wealthy had to worry about. Due to rising property values and the tax threshold remaining static for some years it is now a tax that affects more and more people.
According to figures from Her Majesty’s Revenue & Customs the number of Estates paying Inheritance Tax has grown over recent years and yet Inheritance Tax is sometimes described as a “voluntary tax” because of the number of exemptions and reliefs available.
No-one wants to pay more tax than they are required to. At Macks Solicitors we provide advice in order to reduce or completely avoid the amount of Inheritance Tax your beneficiaries will pay.
Below are the answers to questions we are frequently asked about Inheritance Tax Planning. If you have a question not included here, or you require further clarification, please do not hesitate to contact us. We offer initial advice free of charge and without obligation from one of our specialist solicitors. You can call us on 01642 252 828 or leave us a message and we will get back to you.
What is Inheritance Tax?
Inheritance Tax is paid on the value of your assets on your death. Your assets include your land and property, bank accounts, stocks and shares, insurance policies and personal belongings.
The only property that can be excluded from your estate for Inheritance Tax purposes is certain business and agricultural property which have their own reliefs known as Business Property Relief and Agricultural Property relief.
How is Inheritance Tax calculated?
Inheritance Tax is chargeable at a rate of 0% up to the value of the “nil rate band” which is currently £325,000. If the value of an estate is more than £325,000 then Inheritance Tax is chargeable at a rate of 40%. For example, if your estate is worth £500,000 then HM Revenue & Customs will receive £70,000 in Inheritance Tax.
Are there tax benefits for married couples and civil partners?
Any money passing on a death to your spouse or civil partner is completely exempt from Inheritance Tax because there is a “spouse exemption”.
In October 2007 the “transferable nil rate band” was introduced for married couples and civil partners. Therefore for married couples the nil rate band for both spouses can be utilised so up to the first £650,000 of your joint estate is taxed at 0%.
Are there any other ways to reduce Inheritance Tax?
There are a number of general exemptions that can be used during a lifetime to reduce the inheritance tax (IHT) potentially payable on death. These are as follows:
- Annual Exemptions
Lifetime gifts are exempt up to a certain value (presently £3,000) for each donor in an income tax year. If a person’s gifts in one year are below the exemption limit, the unused balance of the exemption can be carried forward to the following year only.
Consequently if an individual made no gifts last tax year (2013/14) he or she could bring forward the annual exemption for that year (£3,000) to the present tax year (2014/15 where the exemption is again £3,000) and therefore give away £6,000 free of IHT.
- Small Gifts Exemption
Lifetime gifts that a person makes are exempt from IHT up to a total of £250 to each recipient in any tax year. This exemption is available only if the total of all gifts made by the donor to the recipient in any tax year does not exceed £250.
By way of example each year an individual could make use of his or her annual exemption (£3,000) by dividing the same between their children and then make additional gifts of £250 to each of their children’s spouses, grandchildren and anyone else for that matter.
- Wedding Gifts
Gifts in consideration of marriage are exempt from IHT up to a limit that varies in accordance with the relationship between the donor and the parties to the marriage. To qualify for the exemption the gift must be made to one or both of the parties to the marriage and it must be a lifetime gift. The exemption limits are:
– £5,000 if the donor is a parent of one of the parties to the marriage;
– £2,500 if the donor is a grandparent of one of the parties to the marriage;
– £1,000 if the donor is neither a parent nor a grandparent of any of the parties to the marriage.
- Gifts for maintenance of the family
Lifetime gifts for the maintenance of a spouse, child or dependent relative of the donor are exempted from IHT in certain circumstances. A gift for the maintenance, education or training of a child is exempt up to the age of 18 years or until the completion of full-time education if later.
A gift made to a dependent relative of the donor is exempt to the extent that it makes reasonable provision for the relative’s care or maintenance. “Dependent relative” means any relative of the donor (or spouse) who is unable to maintain him or herself because of old age or infirmity. It also includes the donor’s mother or mother–in-law whether or not she is elderly or infirm, unless she is living with her husband.
- Normal expenditure out of income
Lifetime gifts other than gifts with reservation are exempt to the extent that they are made out of the donor’s income. To qualify for this exemption the donor must show that:
– the transfer was part of his or her normal expenditure;
– taking one year from another was made out of income;
and that he or she was left with sufficient income to maintain their usual standard of living.
A gift is regarded as part of the donor’s “normal” expenditure if its amount and type are consistent with his or her usual pattern of gifts. “Normal” is regarded as broadly equivalent to typical or habitual. The first gift in a series can qualify as “normal” provided that there is clear evidence that further gifts are intended. So the exemption could cover an initial gift under a Deed of Covenant or some similar regular commitment such as the first of a series of premiums on a life insurance policy.
“Income” for the purposes of the exemption, means income after income tax and is determined in accordance with normal accountancy rules (rather than income tax rules). Income is measured “taking one year with another” and accordingly the exemption is not lost merely because of fluctuations of income from one year to another. Nor would it be lost if the donor used income to make a gift and, having met some exceptional expenses, was temporarily obliged to resort to capital to meet ordinary living expenses, the depletion of capital later being made good. In practice the “out of income” test is regarded as satisfied if the donor can show that he or she could have made the gift out of income after meeting living expenses. Gifts of property other than cash do not qualify for the exemption unless the donor can show that the property was purchased out of income in order to make the gift.
What about making gifts to charity?
If you give money to charity in your Will then the gift will be completely exempt from Inheritance Tax due to the charity exemption. There is a further incentive to leave a charitable legacy in your Will. A legacy to a charity of at least 10% of your estate will result in a reduction in the rate of Inheritance Tax payable and the rest of your Estate from 40% to 30%.
How can we help?
At Macks Solicitors we can provide specialist advice on all matters relating to Inheritance Tax planning.
You can find a brief description of some of the legal terms you may encounter relating to Inheritance Tax Planning in our glossary of legal terms.