Frequently Asked Questions
What is Inheritance Tax?
At its simplest, it is a tax imposed on the value of your estate when you die.
This tax has been known as:
Estate Duty or Capital Transfer Tax.
But today is commonly known as Inheritance Tax.
Over the years the name may have changed, but not the effect it can have on families as they try to retain the wealth that they have built up over a lifetime of work and the savings they made for that proverbial rainy day.
This tax is probably the most complex of all taxes.
What is Estate Planning?
Well, Estate Planning is simply a series of strategies which can be put in place whilst you are alive, to minimise, or even eliminate, the liability for Inheritance Tax on your estate, when you die.
It is a sad fact that we will all be paying tax until we do die.
Even if we are amongst the ones who do not pay income tax, we do pay indirect taxes such as V.A.T.
There is also a misconception that this tax is confined to the very rich and whilst this may well have been the initial intention of Government, due to several issues, not least the recent increases in property values, nowadays this tax impacts on many more families.
Who pays the tax?
Well the good news is that it isn’t you, simply because you are not around to pay it!!
But the bad news is, that the people who must pay, are the very people you would most like to benefit from your Will and usually this will be your children and grandchildren, So the very people to whom you would like to leave your money, as a final legacy will also inherit a tax bill, which could be very significant.
So what does this tax mean to you?
Well, when you die, your total estate must be valued. This valuation includes all your personal assets, such as your house and all its contents, your car, money, any investments, which haven't been 'sheltered' appropriately and certain types of gifts made in the previous 7 years.
From this total, the Inland Revenue will deduct any debts and liabilities outstanding at the time of your death, and a reasonable allowance to cover funeral expenses...
If the resulting total estate, and we do mean total estate, including the lawnmower, jewellery, antiques, carpets, curtains and more importantly, even the proceeds of any Life Policies (not written in trust) that you may have built up over the years, If that total estate is valued at less than £312,000 for tax year 2008/9 NO Inheritance Tax is payable.
This is called the 'Nil Rate Band' allowance. (NRB)
That may sound very reasonable, but when you take into account that absolutely everything is included in your estate, I think you will agree that it’s a very modest figure. For husband and wife there is usually no liability on first death. All can pass to the surviving spouse.
The problem is that for many years, the Nil Rate Band did not increase with inflation, and so a tax that perhaps was initially intended to be paid by the rich is now hitting most families.
If, as is so often the case, the total assets exceed £312,000, when you die, a tax of 40% is charged on the excess, with no exceptions.
Yes, that's right 40p in every £1 must be paid to the Inland Revenue.
How does the tax work?
Quite simply as your estate increases in value, through inflation, and investment growth, so the tax liability also increases.
As you can see...
|
Estate |
£350,000 |
£400,000 |
£600,000 |
£1,000,000 |
|
IHT Liability |
£20,000 |
£40,000 |
£120,000 |
£280,000 |
|
% of Estate |
5.71% |
10% |
20% |
28% |
In this example we have FOUR estates valued between £350,000, & £1,000,000.
The potential Inheritance Tax liability on the smaller estate is calculated at £20,000, which is 5.71% of the overall estate.
However, when the estate doubles in value to £600,000 the liability rises to £120,000, donated to the Inland Revenue, which represents 20% of the estate...
However, at one million pounds the Tax more than doubles to £280,000. That’s almost a third of your estate going to the taxman.
How can I reduce my IHT liability?
Make gifts
Certain gifts will fall out of an estate immediately, while others will remain chargeable for up to seven years. The main exemptions are summarised in Figure 1 below.
Keep life insurance proceeds out of the estate
Life insurance policies should always be held in trust so that death benefits fall outside the estate and can be accessed without probate.
Review wills
All adults should have a will, which should be reviewed regularly, particularly as children grow older. It should also be noted that marriage or divorce voids previous wills. Beneficiaries can change a will by mutual consent up to two years after death, which is a useful planning tool.
Equalise estates
Spouses should make sure that they each own sufficient assets to use their respective nil-rate bands on death if they are transferring funds to others.
Equity release
Elderly people may have considerable value tied up in their home and many are turning to equity release schemes as a way of unlocking funds which, in turn, can be gifted. There are two main types of equity release. The first is a lifetime mortgage, which is secured against the value of the home and can be released as a lump sum or regular income. The second is a reversion scheme, whereby a proportion of the property is sold to an investment company, but the seller can stay in the property rent- free as long as they wish. Such schemes need to be looked at carefully and may only be suitable in certain limited circumstances, but they can be useful planning tools.
Aim shares and portfolios
Shares listed on Aim are ‘unquoted’ for IHT purposes, which means that shares held in Aim trading companies are not liable to IHT once they have been held for two years. Life insurance is available to cover the interim two-year period. Aim portfolios that include a broad range of shares to reduce risk are becoming a popular way of tackling IHT.
Finally, gifts to registered charities can be made free of IHT and, interestingly, so can
gifts to political parties.
Fig 1: A summary of the main gifts exempt from IHT
|
Gifts exempt from IHT |
Value |
IHT saving |
Comments |
|
Annual gift |
£3,000 |
£1,200 |
An individual can give away £3,000 annually or £6,000 if no gift was made the previous year |
|
Small gifts – an unlimited number |
£250 to each one |
Saves £1.00 per gift |
Unlimited gifts of £250 a year to different people, which must not form part of a larger gift |
|
Wedding gifts (including civil partnerships) |
£5,000 |
£2,000 |
From parent to child |
|
£2,500 |
£1,000 |
To grandchildren or great- grandchildren |
|
|
£1,000 |
£400 |
To anyone else getting married |
|
|
Gifts to spouses (including civil partnerships) |
Unlimited |
40% of gift |
There is a limit of £55,000 on the IHT-free gift when that gift is from a domiciled to a non-domiciled spouse |
|
Regular gifts from income |
Unlimited |
40% of gift |
Gifts must be from surplus income, be habitual or should be documented |
|
Lifetime gifts to individuals (potentially exempt transfer) |
Unlimited |
40% of gift after seven years |
As the donor must survive for seven years after the gift is made, it is important to record the date of the gift. |
What is a Potentially Exempt Transfer (PET)?
This is the term used to describe gifts made during an individual’s lifetime. Such gifts can be of any amount and provided the individual making the gift survives for a period of seven years or more, the value of the cash/assets gifted will fall outside of that individuals estate for Inheritance tax purposes on death.
If death occurs within seven years of making the gift, then the asset is taken into account in determining the value of the estate but at reduced rate. The value is tapered depending on how many years have elapsed. For example there is no reduction if death occurs within three years of making the gift. However if death occurs within five years, the value of the asset is reduced by 60 % for inheritance tax purposes.
On death, how much of my estate will be chargeable to inheritance tax?
Excluding any reliefs which may be available for business property or agricultural property, for the 2007/08 tax year, no inheritance tax is payable on the first £300,000 of your estate. Inheritance tax at the rate of 40% is payable on the value of your estate in excess of this amount.
Is IHT only applicable on death?
There are certain circumstances which can give rise to an inheritance tax during ones lifetime. If an individual makes a gift in excess of the Nil rate band (currently £300,000) or settles assets into discretionary trust (again in excess of the Nil rate band) then a tax charge can arise. This is charged at lifetime rates of 20%.
How much will it cost?
See our Agreement and Fees
Stages
You appoint us │ We send you out a fact find & check list │ Meeting with you to collate the information │Closing Meeting with report. We need the cheque at the same time.
We live in
We can do the fact find & collation by mail, email. The final report, our agent will come & see you and discuss the findings
How long will it take?
After enquiry- We will call you followed by a letter with a view to an appointment within the two weeks. Two weeks to put the report together. Within two weeks to closing meeting, there may be follow up work which will be done in two weeks.
What about my assets in
We have connections with reputable lawyers in Bhuj,
For any other questions please don not hesitate to contact us on 0161 839 1815 or email us at info@ihthealthcheck.co.uk .
