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Inheritance Tax (IHT) is payable on the death or an individual and as most of us try not to consider our ultimate fate is probably not at the forefront of most people’s minds.

However given the relentless rise in UK property prices over the past few years (and even allowing for the current, probably short term price drops) many individuals and couples are likely to find that they have been pushed over the current threshold. For those people now is the time to start planning.

The Threshold

Inheritance tax is payable on the death of an individual and is calculated on the value of their “estate” at the time of death. The current UK threshold for married couples and those in civil partnerships is £624,000 and for single persons is £312,000, but this will rise over the coming years to £350,000.

The joint married couples IHT limit will be raised to £700,000 from 2010.

If the value of your estate, including your home and certain gifts made in the previous seven years, exceed this figure, tax will be due on the balance at 40%.

What is included in the value of an estate?

A person’s estate includes everything owned in their name; the share of anything owned jointly; gifts from which they keep back some benefit, such as a home given to a son or daughter but still lived in by the parent; and assets held in some trusts from which they receive an income.

Against this total value is set everything that the deceased person owed, such as, any outstanding mortgages or loans, unpaid bills, and costs incurred during their lifetime for which bills have not been received, as well as funeral expenses.

How to Avoid IHT

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Money put into a ‘bare’ trust – a trust where the beneficiary is entitled to the trust fund at age 18, counts as a potentially exempt transfer, so it is possible to put money into a trust to stop grandchildren, for example, having access to it until they are older.

However gifts to most other types of trust will be treated as chargeable lifetime transfers. These suffer no tax up to the threshold amount but amounts over the appropriate figures taxed at 20% with a further 20% payable if the person making the gift dies within seven years.

Exempt Gifts

Some cash gifts are exempt from tax regardless of the seven-year rule. They include: wedding gifts of up to £5,000 to each of your children; wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else; other gifts of up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year); gifts of up to £250 each to any number of people each year; gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations.

Help With Cutting Your IHT Bill

Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as the giver still has sufficient income to maintain their standard of living.

Any gifts between husbands and wives are exempt from IHT whether they were made while they were both still living or left to the surviving spouse on the death of the first. Tax will be due eventually when the surviving spouse dies if the value of their estate is more than the combined tax threshold, currently £624,000.

Death Within the 7 Year Period

If gifts are made that affect liability to IHT and the giver dies less than seven years later, a special relief known as taper relief may be available. The relief reduces the amount of tax payable on a gift. (See table below)

When Does the Tax Need to be Paid?

In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years. However if the asset is sold before all the instalments have been paid the outstanding amount must be paid. The IHT threshold in force at the time of death is used to calculate how much tax should be paid.

WHAT CAN YOU DO?

There is quite a lot of scope for you to plan to avoid IHT but there is no single answer that can be given to everyone. If you would like further advice do post a comment or question here or if you would like to speak to a qualified advisor please send an email to postmaster@jamesgreenandco.co.uk .

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Category: Taxation

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