Inheritance Tax Planning
When you die, your estate is valued and this value, along with the value of any transfers in the 7 years prior to death, is subject to inheritance tax (IHT). Generally, any excess over the nil-rate band (currently £325,000) is chargeable to inheritance tax at 40%, less any lifetime inheritance tax paid on transfers. There is a reduced inheritance tax rate of 36% if your estate qualifies as a result of a charitable donation in your will of more than 10% of the value of your estate.
The Finance Act 2016 introduced a further transferable nil-rate band applicable to the transfer of the family home, applicable from 6 April 2017.
Married couples and registered civil partners can pass on unused inheritance tax threshold to effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2015/16, increasing to £1 million with the transfer of the new family home allowance.
The estate value is the value of all the assets in the estate – such as a house, possessions, money, and investments – reduced by any debts owed, including mortgages, household bills, and funeral expenses. It includes your share of any jointly owned assets and the value of any assets held in trust on your behalf.
How is Inheritance Tax Paid?
Inheritance tax is payable by different people in different circumstances. Typically, the executor or personal representative pays it using funds from the deceased’s estate. The trustees are usually responsible for paying inheritance tax on assets in, or transferred into, a trust. Occasionally people who have received gifts, or who inherit from the deceased, have to pay inheritance tax – but this is not common.
When is Inheritance Tax Due?
In most cases, inheritance tax is due within 6 months of the end of the month in which the deceased passed away. After this, interest will be charged on the amount outstanding. The due dates are different if you’re paying inheritance tax on a trust. Inheritance tax can be paid in yearly installments over 10 years if the value of the estate is tied up in property such as a house.
Inheritance Tax Exemptions
Sometimes, even if your estate is over the threshold, you can pass on assets without having to pay inheritance tax. Examples include:
- Spouse or civil partner exemption – Your estate usually doesn’t owe IHT on anything you leave to a spouse or civil partner who has their permanent home in the UK – nor on gifts you make to them in your lifetime – even if the amount is over the threshold.
- Charity exemption – Any gifts you make to a qualifying charity (during your lifetime or in your will) is exempt from inheritance tax. A donation in your will may also reduce the inheritance tax rate from 40% to 36%.
- Potentially exempt transfers – If you survive for 7 years after making a gift to someone, the gift is generally exempt from inheritance tax, no matter what the value.
- Annual exemption – You can give up to £3,000 away each year, either as a single gift or as several gifts adding up to that amount, plus any unused allowance from the previous year.
- Small gift exemption – You can make inheritance tax-free gifts of up to £250 to as many people as you like.
- Wedding and civil partnership gifts – Gifts to someone getting married or registering a civil partnership are exempt up to a certain amount.
- Business, Woodland, Heritage and Farm Relief – If you own a business, farm, woodland or National Heritage property, some relief from inheritance tax may be available.
The Use of a Will in Inheritance Tax Planning
Your Will sets out how you wish for your estate to be distributed to beneficiaries. Without a Will, the estate will be distributed according to the rules of intestacy, which may not be in line with your wishes. It is, therefore, important to ensure that you have a properly drafted Will in order to ensure your wishes are met.
Despite your best intentions, the distribution of this wealth by your Will can have unintended consequences, in terms of tax and in other areas. For this reason, a Deed of Variation can be created within 2 years of the date of death in order to change the terms of the Will.
This can be to provide for someone left out of the original will, to reduce inheritance tax or other taxes, or simply to clear up ambiguities in the Will. From a tax perspective, the Deed of Variation is treated as if the original Will always had the terms of the deed, rather than being a subsequent change.
Inheritance Tax Planning and Wills Service
Tax Innovations can help you to understand the tax impact of the terms of a Will, and to help find alternative terms that would better suit the needs of the beneficiaries of the Will.
If you would like more information regarding Wills and inheritance tax planning, please contact Tax Innovations on 01962 856 990 or email@example.com.
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