The basics of inheritance tax

23rd February 2015 by Liz Densley

The basics of inheritance tax

inheritance taxEven if you think it is too early for you to be worrying about inheritance tax, it may well apply to your parents (or even grandparents), so you need to know the basics.

When is inheritance tax payable?

  • It can apply to certain lifetime gifts at 20% (normally amounts put into trusts), or where the donor dies within 7 years of making the gift.
  • It can apply to the value of your Estate on death at 40%.
  • Trusts can pay a ’10 year charge’ as well as ‘exit charges’.

What gifts/legacies do not attract inheritance tax?

  • Any amounts moved between legal spouses, either during lifetime or on death, do not attract inheritance tax (exceptions if one spouse is not UK domiciled).
  • The ‘nil rate band’ – currently the first £325,000 suffers tax at 0% – effectively does not attract IHT. Where one spouse leaves most of their assets to the surviving spouse, and therefore does not use their nil rate band in full, the unused percentage can be used on the survivor’s death.
  • Annual exemption: £3,000 (and you can use the previous year’s allowance if you didn’t use it then); husband and wife have their own exemption.
  • Gifts in consideration of marriage (amounts vary depending on how closely related you are to the parties to the marriage).
    Small gifts exemption of £250 (so things like normal Christmas and birthday presents do not get caught).
  • Gifts to charities (you can reduce your death rate of IHT if sufficient is left in your Will to charities too).
  • Normal expenditure out of income (see below)

Any outright gifts of any amount provided the donor survives 7 years (known as PETs – potentially exempt transfers).

Exemptions

  • There are 100% and 50% exemptions for certain business and agricultural assets.

Investments

There are certain investments that can work with other IHT rules and minimise IHT – this falls more into the role of ‘financial advice’ – so you will need an independent financial adviser who fully understands these complexities.

Points to consider

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