Inheritance Tax Resources
Inheritance Tax is often described as a voluntary tax. What is meant by that is that, with proper inheritance tax planning, you can leave your estate to your family free of any inheritance tax liability.
When is Inheritance Tax Payable?
Inheritance tax is usually payable on death.
However, if a person’s estate is valued at less than £325,000 at death after liabilities (mortgages etc), no inheritance tax is payable. A person may "inherit" the allowance of a spouse or a civil partner on death. If the spouse or civil partner has not made any gifts within the past seven years, the whole allowance is added to the surviving spouse’s or civil partner’s allowance when they subsequently die. So there may be no inheritance tax to pay if the total estate of the surviving spouse or civil partner is less than £650,000 (as of 2014).
Under certain circumstances, if assets valued at more than £325000 are transferred into a Trust, an "entry" charge may be payable.
The value of assets in a Trust is assessed every 10 years and, if the value is in excess of the prevailing Inheritance Tax allowance, a "periodic" charge of 6% of the excess will have to be paid.
The government has pledged not to raise the inheritance tax allowance until at least after 2019.
Rate of Inheritance Tax
Currently, the rate of inheritance tax on death is 40%. This is payable on the excess value of the estate over the unused inheritance tax allowance. So, if a person had gifted £100000 just before they died the amount of this gift would be added to the estate when the liability for inheritance tax was being assessed.
Ways of Legally Avoiding Inheritance Tax
There is a number of ways inheritance tax liability can be reduced if not eradicated.
Without going into detail, these inheritance tax avoidance strategies can include:
- Using the annual gift allowance
- Assigning income to a beneficiary
- Potentially exempt transfers – these are gifts which are made which, if the person making the gift dies within 7 years, would still attract inheritance tax although the amount payable could be less than 40% depending on how long it was between the gift being made and the death of the person making the gift. This is known as taper relief.
- Using various Trusts – although not all Trusts are suitable for inheritance tax planning
- Investing in assets which are free from inheritance tax. These are assets which attract Business Property Relief or Agricultural Property relief. Certain other investments are also eligible for relief from inheritance tax. They usually have to be held for at least 2 years before death.
It is impossible to generalise about an Inheritance tax reduction or avoidance strategy. It depends on individual circumstances and a client’s wishes and aspirations.