INHERITANCE TAX - WILL IT AFFECT YOU?
Inheritance Tax (IHT) is sometimes described as the voluntary tax and, contrary to popular belief, is not a tax on the rich only. It affects thousands of families across the UK, especially those who did not see it coming and who hadnít made any plans to reduce the tax bill.
Despite recent reductions in house prices, the ongoing trend is that the value of residential homes increases at a faster rate than inheritance tax relief. This has the effect of catching many people unawares and beneficiaries unwittingly have to pay large amounts of tax.
HOW IS THE TAX CALCULATED?
Your estate is made up of the value of your assets. Assets can include your house and its contents, your personal belongings and any savings or investments you have. The Inheritance Tax Nil Rate Band is the amount of the estate on which there is no Inheritance Tax to pay. Inheritance Tax is paid on any estate over this amount. The threshold (i.e. top limit of the nil rate band) for 2009/10 is £325,000. The rate of tax is 40%, so it can really eat into the money you leave to your family. Inheritance Tax can also become due on gifts or transfers of assets during your lifetime. The estate is valued on the day after death. This means that, even if, say, house prices fall and a lesser amount is received on sale, the higher sum is used to calculate IHT.
CAN I DO ANYTHING TO AVOID IT?
Yes, but you have to be prepared. With a little advance planning, you should be able to reduce your liability to tax or avoid it altogether. In fact there are so many exemptions and reliefs from Inheritance Tax, you would be wise to take advantage of them.
WHAT IF IíM A BASIC RATE TAXPAYER?
Many people think they wonít be liable for Inheritance Tax if they are paying basic rate tax, but often that is not the case. And, even if your home were worth less than the IHT threshold youíd be surprised how much your estate might be when you add up all your other assets, which might also include the proceeds of a life insurance plan. If you only pay basic rate tax now, you might become a higher rate taxpayer after your death!
WHO PAYS THE TAX AND WHEN?
The tax is normally payable by your beneficiaries on your death. The tax bill must be paid within six months of the death and before Probate is granted. That is before the Will is officially recognised and the estate can be divided up amongst the beneficiaries. This can be very difficult for those inheriting the estate because they may have to sell assets - the family home, for example - in order to pay the tax bill. This often means selling at a loss under pressure to realise capital early. This is particularly pertinent in times of a slack housing market. HM Revenue and Customs have the right to be paid first and this timing issue is exactly the sort of difficulty that good planning can overcome.
TAX EXEMPTIONS AND RELIEFS
Gifts between civil partners or husband and wife
Some gifts or transfers of assets are free from Inheritance Tax whenever they occur. One of the most common and genuine gifts are between civil partners or husband and wife, which are always exempt from tax whether they are made before or after death.
The Nil Rate Band
This is one of the most useful planning tools. Careful planning can help to move assets up to the value of the Nil Rate Band out of the estate in the event of the first death, which will then help to minimise the tax payable in the event of the second death. There are various ways of doing this, some can be complex if the surviving partner has a requirement for on-going income and in some cases it can be as simple as re-writing a Will.
Transfer of unused Nil Rate Band
Where a spouse or civil partner dies and has not used their nil rate, the unused amount can be transferred and used by the survivorís 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 survivorís death. i.e. £650,000.
Making gifts during your lifetime
Potentially Exempt Transfers
If you make a gift during your lifetime, they are called ĎPotentially Exempt Transfersí. This means they might be exempt from tax, but only if you survive for seven years after the gift takes place. Otherwise they may be added back in to the estate value. There is a sliding scale of reduction in tax for these gifts where the person making the gift (donor) dies within the seven year period and this is called Ďtapering reliefí (see table below). Effectively the tax liability for these gifts reduces for each year following the date of the gift so that if the donor survives the full seven years, no tax is due on the value of the gift.
Many people prefer not to think about taxes that are due on their death,but getting expert advice could save you and your family a considerable sum of money. However, knowing about the potential problem is only the start. What you need to do now is make sure you take some action.
Our advice is entirely confidential and we will:
As Independent Financial Advisers we are duty bound to find the best financial products and plans to suit your personal circumstances from the whole market.