Inheritance Tax (IHT) is paid on your estate when you die and also when money is transferred into some trust funds. Some other transfers during one’s lifetime may also be subject to IHT. The first £325,000 (2017/8 rates) of the estate is exempt from IHT. This is called the nil rate band. The assets in the estate are valued on death, the nil rate band subtracted and the remainder of the estate is taxed at 40 per cent. Chargeable lifetime transfers are taxed at 20 per cent. Transfers made within seven years of death which are brought back into the value of the estate for IHT purposes are charged at 40 per cent.
A further nil-bandhas been added as a 'top up' where the assets include a residential property. The aim of this change is to ensure that transfers of family homes are shielded from the full impact of IHT. Thuis will rise to £175,000 by 2020. It is available, with limitations when the property is passed on tochildren (including adopted, foster or stepchildren) or grandchildren.
Where one spouse transfers part of their estate to the surviving spouse or civil partner, the percentage of the 'tax free' transfer is calculated and the ramaining percentage is then used to uplift the tax free amount on the second spouse or civil partner's death. How this works is not straightforward, but potentially allows a 'double IHT free limit' to be enjoyed. The value of the transfer is based on the percentage of the then nil-band on the date of the first death multiplied by the current nil band. So, for example, if the IHT limit on the first death was £200,000 and the estate of the first deceased £150,000, then 75% of the nil-band was used. So, on a death in 2017/8, the transferrable value would be 25% of £325,000 - the current nil band.
IHT used to concern only the wealthy. Nowadays, however, more and more people find themselves within its ambit.
There are exemptions from IHT for the following:
You are also allowed to give away up to £3,000 per annum. This allowance can be carried forward to the next year, if not used in a tax year. The carry forward is for one year only.
Gifts made ‘out of income’ are also excluded. These must be of a scale that does not affect the lifestyle of the donor and must normally be regular – an example might be school fees paid by a grandparent. These must be justifiable. There is evidence that HM Revenue and Customs are looking more carefully at these and seeking to disallow them when possible, so, for example, setting up a standing order to transfer regular smaller sumsmay be preferable to less frequent, larger transfers.
What Can be Done to Reduce IHT Liability?
Specialist advice should always be sought.