Inheritance Tax
Inheritance Tax (IHT) is chargeable on individual estates valued at £300,000 or more, at a rate of 40%. This tax is applicable to all beneficiaries including family and friends but it is not applicable to married couples or civil partners. There are further exemptions from the tax, see below for more details.
This personal allowance will increase to £350,000 per individual beginning tax year 2010-2011. However from 9th October 2007 couples (those married or in civil partnerships) will be able to combine their allowances, in order to double their total tax allowance or ‘nil-rate band’.
This means that if one spouse dies they are entitled to bequeath £300,000 to family and friends without paying tax. If the deceased does not use all of the allowance, then the remaining amount is transferred on to the surviving spouse’s allowance.
There is no limit to the amount of wealth that can be transferred tax free from one spouse to the other, before or after death.
For Example
If a deceased spouse, Mr X leaves £100,000 in inheritance to his children, the amount is not taxable as it falls within his ‘nil-rate band’.
The remaining £200,000 of the allowance is then transferred to the surviving spouse, Mrs X and becomes part of her IHT allowance, so her ‘nil-rate band’ will then be £500,000.
If you are a widow or widower and your deceased spouse did not use the full amount of their ‘nil-rate band’ then you are eligible to combine this outstanding amount with your own allowance to increase your tax-free slice. It is possible to combine these personal allowances, regardless of when your spouse died, as long as the surviving partner is still alive. There is no need to apply for this transfer; it comes immediately into effect once the surviving spouse dies.
For more information see; http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_4016736
Exemptions
Inheritance Tax is not payable on wealth which is inherited by;
• Spouses or civil partners
• Registered UK charities
• Some national institutions such as museums and universities
• UK political parties
It is important to bear in mind that when a person dies, gifts over the value of £250 which they have bequeathed in the seven years preceding their death will be factored in to their personal allowance. There are further exemptions to gifts received in the seven-year period including;
• Wedding gifts
• Maintenance allowances to ex- and current spouses, relatives and children under 18
• Gifts to children under 18 and in full-time education
For full details on exemptions from IHT visit: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10010612
If you chose to transfer wealth over the personal IHT threshold (£300,000) into a company or newly created trust, then there is an immediate inheritance tax of 20% payable on the excess. The threshold figure will also take into account any gifts made in the preceding seven years, under the same terms as the normal IHT.
If you die within seven years of making a company or trust transfer and you paid 20% IHT, then the amount will be subject to the full 40% IHT rate. If you did not pay IHT on the initial transfer then the figure will be added into your estate to work out any IHT which may be due.
For more information on transfers to trusts and companies, visit; http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/InheritanceTaxEstatesAndTrusts/DG_10038335
The Independent Newspaper has created a guide to paying less inheritance tax, see; http://business.timesonline.co.uk/tol/business/money/tax/article1297235.ece