Inheritance Tax – Frequently Asked Questions
What is Inheritance Tax?
Inheritance Tax (IHT) is the tax which may be required to be paid out of your estate upon your time of death. IHT is not due on the first £325,000 of your estate this initial tax free part is known as the Nil Rate Band (£325,000 2010/2015). Anything above the basic ‘Nil Rate Tax Band’ of £325,000 can be taxed at 40%.
In most cases, Inheritance Tax must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing.
Is IHT payable during your lifetime?
In certain cases, IHT may also be paid during your lifetime if what is known as a chargeable transfer in excess of the nil rate band, such as a gift into a Trust, is made. The lifetime rate of IHT is 20%.
Thus, if £425,000 was transferred into Trust, the excess above the current nil rate band of £100,000 would be taxed at 20% creating an IHT bill of £20,000.00. In addition, the Trust would be charged at any excess above the nil rate band every 10 years at an IHT rate of 6%.
Who can I give ‘tax free gifts’ to?
During your lifetime or via your will,it is possible to give a number of gifts away that are exempt from IHT. There are a number of people (beneficiaries) who can receive these exempt gifts;
Husband, wife or civil partner (even if legally separated) and they are domiciled in the UK
UK Political Parties
Some National Institutions
However, IHT can still be deemed payable on a gift, if the “giver” dies within a certain frame, these are known as PETS.
What are PETs?
Potentially Exempt Transfers (PETs) are gifts made during your lifetime, exceeding the annual gift allowance of £3,000 but within the Nil Rate Band. Provided the donor survives for a further 7 years, no tax will be payable and the gift becomes a PET.
In the event of death within the 7 years, tax will be payable, there are specific conditions attached to this which our specialist team can discuss with you.
A PET can be a highly effective way (if utilised correctly) of reducing your IHT liabilities while simultaneously ensuring that your assets are passed to your intended beneficiaries.
What other gifts are exempt?
Some gifts are exempt from IHT because of the type of gift or the reason for making it. These include:
Wedding/ Civil Partnerships Ceremony Gifts
Normal Expenditure Gifts
These gifts can be given at anytime during your lifetime.
Who pays Inheritance Tax?
Ordinarily, on death, the ‘personal representative’ (the person nominated to handle the affairs of the deceased person) arranges to pay any Inheritance Tax that is due.
How can we help?
Whether you need assistance in drafting a tax efficient wills or Trusts or you have a few queries surrounding inheritance tax we can ensure you do not pay more tax than necessary.
Simply call our friendly office on 01202 802807 to arrange a free initial meeting to discuss any questions you may have.
Paul Solomons – Head of Solomons Asset Protection Division
Paul is a member of the private client section of the Law Society and the specialist Society of Estate and Trust Practitioners (STEP).