Wills & Inheritance Tax (IHT)
Inheritance Tax (IHT) used to be considered a tax applicable only to the rich. However, the rise in property prices in recent years has made the making of wills and post-death planning advisable for many, as estates worth more than £312,000 (2008/09) are potentially liable to inheritance tax on the excess at 40%.
In addition to assets owned at the date of death, a proportion of substantial gifts made within 7 years of death are also brought into the calculation of tax on a sliding scale. 100% of gifts made in the 3 years prior to death, 80% of gifts made in the 4th year, 60% in the 5th year, 40% in the 6th year and 20% in the 7th year.
Fortunately, there are some legitimate ways in which you can soften the IHT blow:
- By using the spouse exemption. As there is no charge to IHT on assets given or bequeathed to a spouse, IHT can be reduced or deferred depending on the amount and allocation between the spouses of their assets. Co-habiting people need to be aware of this when doing their tax planning
- On the second death, since 9 October 2007, the uused Nil rate band of the first deceased is transferred to the second deceased
- By making lifetime gifts of up to £250 p.a. to any number of persons
- By making gifts to people getting married. Parents can give £5,000 each, grandparents £2,500 and anyone else £1,000
- By making regular gifts out of income that do not reduce the donor's usual standard of living
- By making gifts to charities, dependent relatives, political parties and national institutions
- By making gifts not covered above of up to £3,000 p.a. if unused one year, the allowance can be carried forward for one year only
Please note: The 7 year rule does not apply to the 5 types of gift listed above.
As already mentioned, by making other gifts and surviving 7 years. An important condition is that the donor does not retain a right to benefit from the donated asset.
By investing in business or farming assets that, subject to various conditions, can attract 100% relief from IHT.