HM Revenue & Customs’ own figures show that some 15,000 estates
paid Inheritance Tax (IHT) in 1997. It is anticipated that the
figure for 2007 will more than double to around 35,000 paying IHT.
There are however steps you can take to reduce or even remove this
tax’s impact on your estate. Elin Phillips, a Wills and Probate
specialist with Harding Evans explains how.
What is IHT?
It is a tax, charged on the value of the net assets of a person’s
estate on their death. The rate of tax on the first £300,000 of
assets is 0% (often called the ‘nil rate band’). Assets over the
£300,000 threshold are subject to a tax rate of 40%. In some
circumstances, IHT must also be paid on substantial gifts made
during a person’s lifetime.
Who is responsible for making sure that the IHT is paid?
The Personal Representatives administering the deceased’s estate are
legally responsible for working out if there is IHT payable, by
completing the necessary forms and arranging for the tax to be paid
to the Revenue, from the assets in the estate. Personal
Representatives can face criminal penalties if they fail to do so.
If a lifetime gift is substantial enough to trigger an immediate IHT
bill, the person making the gift is responsible for paying the tax
at that point.
Will my spouse have to pay this tax?
Couples who are married or in a civil partnership benefit from what
is commonly known as ‘spouse exemption’. Subject to rules about your
country of domicile, any transfers (lifetime or on death) from one
spouse to another are free of IHT, regardless of value. When the
first person dies, there will not be any IHT to pay, but the tax
bill due on the death of the surviving spouse/civil partner may be
substantial – the nil rate band protecting the first £300,000 of
their estate but the remainder being taxed at 40%. Reviewing your
wills could help ensure that this scenario is avoided. It is worth
noting that the spouse exemption is not available to co-habiting
couples who are not married/in a civil partnership.
Can I give away part of my estate now?
Yes, some gifts can be made without risk of future liability to tax.
You can give away £3000 a year, and can do this for the previous
year if that exemption hasn’t already been used. A couple, each
using their annual exemption, can thus reduce their joint estate by
£6000 a year, on an ongoing basis. Individual gifts of £250 can also
be made, to an unrestricted number of recipients, provided that no
one person receives more than £250. Any gifts to registered
charities are exempt, regardless of the amount given. If a relative
is getting married, bear in mind that certain wedding gifts are IHT
exempt. An increasingly popular exemption is regular gifting from
income, and no limit is specified as to the value of such gifts.
However, a pattern of giving must be shown, the gift must come from
income, and should not have an adverse effect on the donor’s
standard of living. You may also be able to use the spouse exemption
to equalise the value of yours and your spouse’s estates, which may
then provide an opportunity for more specialised IHT planning.
What about giving away more substantial gifts whilst I’m alive?
There is nothing to prevent you from doing this, provided that you
can afford to do so, and won’t need to rely, at a later date, on the
assets you are intending to give. However, you must out-live the
gift by seven years for its value not to have an impact on the IHT
liability that may arise on your death. Problems arise if you
attempt to give away an asset but still use it or receive income
from it. You should also bear in mind that certain large gifts into
trusts can result in an immediate, ‘lifetime’ Inheritance tax bill
being due.
I understand that farms and businesses are exempt from IHT
anyway?
Some assets attract a specific relief from IHT by virtue of what
they are – agricultural and business property reliefs exist (‘APR’
and ‘BPR’). Various criteria, including periods of ownership,
composition of the farm or business and the nature of the
enterprise, must be satisfied for such reliefs to be secured. If
successful, 100% relief (limited to 50% relief for some assets) from
what could otherwise be a significant IHT liability, can be claimed.
Many cases exist recording disputes between the Revenue and Personal
representatives as to whether or not APR or BPR is available in a
particular set of circumstances, illustrating the importance and
potential complexity of this area.
Would updating our Wills help?
It is always worth reviewing existing wills, or making wills if you
have not already done so. Everyone’s circumstances are different,
but wills can be structured to include provisions which reduce an
estate’s liability to IHT, by ensuring that some of the steps
already mentioned are put in place, and that all available
exemptions are used. A review of your Wills can also provide the
opportunity to look at steps that can be taken during your lifetime
to safeguard as much of your estate as possible for your nearest and
dearest.
