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In the fourth of our series of legal columns
Elin Phillips, a wills and probate specialist at Harding Evans
Solicitors highlights some of the key aspects of inheritance tax. |
1. What is inheritance tax?
This is the tax payable when someone dies. The first step is to work
out the value of the net estate at the date of death. The ‘net
estate’ is the total value of the deceased’s assets (e.g. house,
bank account, investments), less any debts that they owed when they
died, such as a mortgage, credit card, or catalogue account. The
first £275,000 worth of the net estate is free of inheritance tax.
This £275,000 is called the nil rate band.
Any part of the estate over and above the nil rate band is taxed at
a rate of 40%. Other exemptions and reliefs against inheritance tax
are available. In recent years the nil rate band has been increased
annually by the Chancellor in the Budget.
2. Who pays inheritance tax?
The Executors or Administrators of the estate are responsible for
paying the tax. It should be paid from the deceased’s assets. There
is no inheritance tax to pay on assets passing from a husband to
wife (or vice versa) when one of them dies. Here, the spouse
exemption applies and this is limitless, as long as both spouses are
domiciled in the UK. (The same exemption will apply to same sex
couples who register a Civil Partnership after 5th December 2005).
However it is worth noting that when the surviving spouse dies,
inheritance tax will be payable on any part of their estate not
covered by the nil rate band. It is important to take account of
this tax when making a will in order to make the most of any
inheritance tax planning opportunities that might be available to
you.
3. Do only the wealthy have to consider tax planning?
It is an issue that now affects an increasing proportion of the
population. In recent years the steep increase in house prices has
meant that more and more people find that their estate is worth more
that the nil rate band of £275,000. This means that, for example,
children of the family can be faced with an unexpected tax bill
which can significantly reduce the value of what they ultimately
inherit.
4. What can you do to avoid or cut down the inheritance tax bill?
The first step is to be aware of the value of your estate, and to
find out which reliefs and exemptions against inheritance tax might
help in your particular circumstances. You can give away certain
amounts during your lifetime without these gifts affecting the tax
position on your death. Care must be taken when making gifts of a
substantial nature whilst you are alive as you may need those assets
yourself. Such gifts might still be taxable if you die within seven
years of making the gift, and very specific rules apply with regard
to attempting to give away a property which is your home.
Setting up trusts, either during your lifetime or through your will
to take effect when you die, can also be considered. The key is to
make sure that full use is made of the exemptions and reliefs
available against this tax in order to make tax efficient provisions
for your loved ones.
5. How are businesses affected by inheritance tax?
If business or agricultural property make up part of your estate,
certain tax reliefs may be available for the business, its shares,
land, buildings and machinery. These reliefs can apply at different
rates. It is important to get expert legal advice and review the
ownership and current values of business/agricultural property in
order to maximise the methods of reducing inheritance tax liability.
For more information on any aspect of inheritance tax please contact
Elin Phillips at
Harding Evans Solicitors
Queens Chambers
2 North Street
Newport
NP20 1TE
Tel: 01633 244233
www.hardingevans.com
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