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SIGNpost : Inheritance Tax
"Inheritance Tax - but surely I'm not so rich that what I leave when I die will be taxed - will it?"- you might ask
Well, maybe not, but a lot of people forget that, if they own their
home, its value at today's high property prices could result in their
estate being liable to Inheritance Tax. So, here is:
A BRIEF OVERVIEW
Inheritance Tax (IHT) applies to money
and/or gifts with a capital value that are passed on when a person dies
(or sometimes before). No tax is payable up to a certain capital value
but, beyond that, the bad news is that the rate is 40%.
The good news, however, is that with early enough planning and some
professional advice the majority of people who would be liable to IHT
will certainly be able to minimise and often avoid paying it.
The Basics
The first £263,000 (2004-2005) of an individual's estate is tax-free. A person's estate includes the total of:
- Everything owned in his or her name;
- The share of everything jointly owned;
- Gifts from which he/she keeps back some benefit, for example,
a house still lived in and maintained, although given to someone else;
- Assets held in trust from which he/she gains some benefit (e.g. an income).
Any amount in excess of this value is taxed at a single rate of 40%. However, there are a number of exemptions and concessions:
- Most importantly, there is no tax on gifts or inheritances between spouses;
- Most family-owned businesses and farms are exempt;
- Certain gifts are exempt e.g. wedding gifts up to £5,000 for
each child; small gifts to any number of individuals providing it is
under £250 each;
- all outright gifts to registered UK charities etc. (see
Inland Revenue guidance for a list of these exemptions and their
values);
- Most lifetime gifts are exempt providing certain conditions are met.
Lifetime Gifts
As people get older they sometimes
wish to make gifts to people, especially their own family. There is no
immediate tax on lifetime gifts between individuals, and they become
completely exempt if the donor (the person giving the gift) survives
for seven years. When the donor dies any gifts made within the previous
seven years (apart from those exempt from IHT) will become chargeable
and their value is added to that of the estate. The total is then taxed
on the excess over £285,000 (2006-2007).
Taper relief reduces the amount of tax due depending on how close to the seven year limit the gift was made:
- Death within 3 years - no reduction in IHT
- Death between 3 & 4 years - 20% reduction
- Death between 4 & 5 years - 40% reduction
- Death between 5 & 6 years - 60% reduction
- Death between 6 & 7 years - 80% reduction
Capital Gains Tax (CGT)
In addition to any IHT that you may be
required to pay, Capital Gains Tax (CGT) has to be paid on any gain
that has built up on any asset you gave away during your lifetime and
that is subsequently sold. Various exemptions and reliefs apply, and
there are many legitimate ways of minimising any liability. This can
become quite a complex area and professional advice should be sought.
Have you made a will?
As discussed in another SIGNpost item on this site,
the rules of intestacy (dying without a will) can have serious
consequences, therefore it is strongly recommended that you have a will
drawn up, not only to ensure that your wishes are carried out, but also
that any taxes are reduced to a minimum. If you have already made a
will, it may also be worth reviewing it with a professional adviser.
Further Information
You can obtain more information from www.inlandrevenue.gov.uk or through a series of leaflets that are available from any local Tax office, including:
- An introduction to Inheritance Tax (IHT3)
- Inheritance Tax on Lifetime Gifts (IHT2)
- Capital Gains Tax - An Introduction (CGT1)
This article is meant only to provide an overview of what can be a
very complex system. If you believe that Inheritance Tax or Capital
Gains Tax may be an issue for you it is strongly recommended that you
seek professional advice.
Possible Changes
Finally, the Government has been promising changes to Inheritance
Tax for some time and there is a some indication that changes including
possible different rates for different bands may be announced in the
April 2007 Budget - so keep a look out.
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