Inheritance Tax
What is it?
Inheritance Tax (IHT) is a tax that's sometimes payable on your 'estate' - everything you own at the time of your death. It's also sometimes payable on assets you gave away during your lifetime such as property, possessions, money and investments. Many people do not need to worry about it because the value of their estate is below the threshold for the tax or they have undertaken financial planning to avoid it.
How much is it?
The threshold for anyone who dies after 6 April, 2008 is £312,000. If the value of their estate, including their home and certain gifts made in the previous seven years, exceeds this figure, tax will be due on the balance at 40%.
What is included?
Anything owned in your name and a share of anything owned jointly. If you have given property to a child but you still live in it or if you have income from assets in trust then these are also liable. Once the total value is known, money will be deducted for things like funeral bills and outstanding mortgages or loans. If what remains is worth more than £312,000 then tax is due.
How can IHT be avoided?
Any money you give away is not liable for IHT if you then survive for a minimum of seven years. Gifts of this kind are called 'potentially exempt transfers' and are useful for tax planning. It is also possible to put money into certain types of trust to create a potentially exempt transfer. This is popular with grandparents who want to set aside cash for grandchildren when they reach a certain age. If you die within seven years of giving money which is not exempted from IHT, a special taper relief may be available to reduce the amount of tax payable.
Are there any exemptions I should know about?
Some cash gifts are completely exempt from IHT. These include:
- wedding gifts of up to £5,000 to each of your children
- wedding gifts of £2,500 to each grandchild
- wedding gifts of £1,000 to anyone else
- other gifts of up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year)
- gifts of up to £250 each to any number of people each year
- gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations
- regular gifts from after-tax income, such as a monthly payment to a family member remain exempt as long as the giver still has sufficient income to maintain their standard of living.
- gifts between husbands and wives are exempt from IHT whether they were made while they were both still living or left to the surviving spouse on the death of the first. Tax will be due eventually when the surviving spouse dies if the value of their estate is more than the tax threshold.
When does IHT have to be paid?
In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Now you know why the aristocracy often end up selling off the family silver to pay 'death duties'. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years. Though if the asset is sold before all the instalments have been paid the outstanding amount must be paid
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