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Inheritance tax (IHT) is normally payable on death but can be partly payable earlier. It is also sometimes called a voluntary tax because there are so many ways of avoiding it. However, they are not straightforward.
Investments free of IHT Provided you have invested for at least two years, the following are exempt: - investments in AIM and unquoted shares (these can be invested via unit and investment trusts)
- commercial forestry
- assets connected to Lloyds of London. Making gifts during your lifetime Inheritance tax (IHT) may be payable on gifts you make before your death but, if you can afford it, there are a number you can make free of IHT. Of particular importance are the £3,000 annual exemption (higher amounts on marriage) and the unlimited number of gifts of £250 to any one person. PETs, ICTs and taper relief Gifts to individuals or certain trusts not otherwise exempt are potentially exempt transfers (PETs). Tax is avoided if you live for seven years thereafter but if not it may be payable on your death. Gifts to companies or discretionary trusts are called immediately chargeable transfers (ICTs) and half the IHT rate of 40% is payable immediately. The balance may become payable if you die within seven years but if no tax is due then you cannot recover what has been paid. When PETs and ICTs within seven years of death are included in an estate, they are first set against the threshold in chronological order. If their total exceeds the threshold then the relevant donees (the recipients of the gifts), not the estate, are responsible for paying the IHT on them. If the period since the excess amounts were paid is more than three years, then taper relief applies. Tax on the relevant amounts is reduced to 80% of the full charge (i.e. 32% tax) in the fourth year, 60% of it (24%) in the fifth year, 40% (16%) in the sixth year and 20% (8%) in the seventh year. In the case of ICTs, tax already paid is deducted from the tax due but cannot be used to create a refund. Tax payable on death Amounts left to your spouse are free of IHT and most couples leave everything to each other, but this may not be the best solution. The first £242,000 of taxable estate (the current exempt amount or threshold) is free of tax. It sounds a lot but with house values now so high tax may be payable. Beyond the threshold the tax rate is 40%. PETs and ICTs made within seven years of your death are counted in order of payment and so are set against the threshold first. There is taper relief from the fourth year but it only applies to amounts which exceed the threshold. Paying IHT It must be paid before grant of probate (official permission for executors to act) but assets cannot be sold before getting probate, so it may be necessary for the executor(s) to borrow. If the estate includes property, it is possible to defer payment of the proportion of IHT payable equal to the proportion of the property value to the whole estate. Some banks and building societies will release cash from the deceased person's account for the purpose of paying IHT. Certain investments which include life cover, such as with profits bonds, although subject to IHT, can be written into trust so that they pass directly to your heirs and can then be realised to meet some at least of the tax bill. Estate planning So far as planning is concerned, the importance of making a will cannot be overstressed. Otherwise, intestacy rules apply, which may not suit you. If a married couple's joint estate may exceed the threshold they need to find a way of using the exempt amount on the first death. The problem usually is that the survivor cannot manage without the assets, particularly the house. There are ways in which this problem can be overcome but they need to be watertight so the use of a solicitor experienced in IHT planning is essential. Usually a trust is set up to come into operation on the first death and receive assets up to the exempt amount. It is possible for the surviving spouse to be a beneficiary. If all the beneficiaries agree, a will can be changed within two years of the death this is called a deed of variation. If you know that IHT will be payable, make some provision for it, such as life assurance. For a married couple, a joint life second death policy can be taken out, written into trust for the beneficiaries so that it escapes the IHT net. Check whether your bank/building society deposits will be released. Resource Box: If you need to borrow money, http://www.homeloansonline.org.uk provides a quick and easy application form. Get all the options clearly explained to you and then choose. Ideal for people looking for a low cost unsecured loan |
