Inheritance Tax Exemptions & Allowances
Firstly let's begin with explaining how Inheritance Tax (IHT) is charged.
Inheritance Tax is charged on the value of the estate of a deceased person. It applies to individuals who are domiciled or deemed to be domiciled in the UK, and to non-domiciled individuals who have UK assets.
Quite simply Inheritance Tax is charged on the value of an individual's estate over a certain limit.
In the tax year 2008/9 the limit being £312,000 on which tax is charged at 40% (40 pence in every £) above that threshold.
The first £312,000 is called the “nil rate band”. It is called a nil rate band since it is not tax free – but merely taxed at 0%. – Making it simpler for the Chancellor to vary the bands and rates, should he wish.
The value of an estate is the sum of all a person's assets minus any debts. The assets include absolutely everything a person owned at their death.
With the rise in house prices over the last decade many estates may now exceed this nil rate band and therefore subject to IHT.
Inheritance Tax Exemptions:
In terms of Inheritance Tax planning, transfers between spouses (including civil partners) during life or on death are totally exempt from Inheritance Tax. However care must be taken, since all that may be achieved is to pass on the burden.
Find out about more at one of Ashwood Law's Free Inheritance Tax Seminars.
Inheritance Tax Allowances:
Modest amounts can be given away each year. An individual can give away up to £3,000 each year outside the scope of Inheritance Tax. Unused allowances for one year only can be carried forward. This enables an individual to give away potentially up to £6,000 free of IHT (Making £12,000 for a couple).
Small Gifts of up to £250 can be made to as many different people as you like with no IHT implications. Needless to say no one individual can receive more than one £250.
Wedding Gifts can also be given without a liability. Parents may give each of their children up to £5,000, and grandparents can give up to £2,500. Other friends and relatives can be given up to £1,000 on this basis too.
Gifts you make out of your after-tax income (not captial) are exempt from IHT if they are part of your regular expenditure. You may wish discuss ways of using your surplus income, tax efficiently.
Using the allowances wisely and regularly can save your beneficiaries a tremendous amount of Inheritance Tax.
Care and advice is necessary during Estate Planning to ensure “gifts” are valid. Gifts made incorrectly will be added back to the Estate and therefore ineffective from a tax planning point.
It's equally important that a “record of gifts” is kept to satisfy HM Revenue and Customs that the gifts were genuine and valid. Full details of Inheritance Tax can be found on the HM Revenue and Customs website.
Find out about more at one of Ashwood Law's Free Inheritance Tax Seminars.