We are able to give advice on all issues relating to Inheritance Tax. We set out below a brief guide to some of its main points. Please note that the law and its interpretation are subject to constant change. Our comments are only meant for general guidance.
A quick guide
Inheritance tax is payable on death (subject to the NRB) at 40% and on life time gifts at 20%
The Nil Rate Band (“NRB”)
An individual may transfer assets up to the value of £325,000 over a seven year period or leave a similar sum on death without having to pay Inheritance Tax. This is known as the Nil Rate Band. The NRB has previously been subject to annual change, the current rate however has not been increased since 2009. You can inherit an NRB from a deceased spouse or registered civil partner which means that on the death of the survivor you may leave a tax free estate of up to £650,000.
Inheritance Tax (IHT) – the seven year rule
A gift of property more than seven years before your death will normally not be taken into account for the purpose of calculating IHT. This does not apply where a gift is made into a Trust or where there is no direct beneficiary of the gift ie the payment of a grandchild’s school fees. In such circumstances, a chargeable gain will arise. IHT will only be payable however where the Nil Rate Band is exceeded and other exceptions do not apply.
Gifts out of income
Inheritance Tax may be avoided in a number of ways. One of the simplest is by means of ‘gifts out of income’. The income must be surplus to requirements and cannot amount to an indirect payment of capital.
The de minimis rule
There are very strict rules on using assets that you have given away. For instance, if you have given away a holiday home, you may not use it for more than two weeks a year without paying rent. If you use it in excess of this period, you will be treated as owning it for IHT purposes.
Loss – not value
Liability for IHT is calculated on the loss to the donor, not the benefit to the donee. So, if a pair of Ming vases is worth £10,000 but individually one vase is only worth £3,000, then the gift of the vase is treated as a gift of £7,000 and not of £5,000.
Post death variation
The terms of a deceased’s will can be amended up to two years after their death, notwithstanding the distribution of the estate. This can be a useful means of limiting IHT.
Business Property Relief (“BPR”) and Entrepreneur Relief
Capital Gains tax can be avoided on the sale of business assets by the use of Entrepreneur Relief. Inheritance Tax can also be avoided on the inheritance of business assets which qualify for BPR.