Inheritance Tax is the name given to the tax paid when assets are given away and the full rate of tax is currently set at 40%
IHT usually applies when you die but can also apply during your lifetime.
During your lifetime
IHT applying during your lifetime is charged in one of two ways. If you give an asset away and it qualifies as a Potentially Exempt Transfer (PET), there will be no IHT to pay provided you survive for at least 7 years after making the gift.
Any assets that you give away which do not qualify as PETs are known as Lifetime Chargeable Transfers (LCT). If the value of the gift (technically the difference between the total value of your assets before and after making the gift) is above the Nil Rate Band (tax free allowance - see section below), you will need to pay IHT immediately and this is currently set at half the full rate i.e. 20%. However, if you die within 7 years of making the gift, additional IHT may be due.
It is therefore essential to review your IHT positon before making any gifts.
When you die
Everything you own is valued and added together to form the ‘gross Estate’. The value of items or money you gave away in the 7 years before you died are also added to this value. Any debts that you owe (for example a mortgage or credit card) are deducted and the amount left is known as the ‘net Estate’.
Inheritance Tax applies to every person that leaves a net Estate which totals more than £325,000. Married couples and couples in a civil partnership can combine their tax free allowances to give a tax free allowance of £650,000.
The government also recently introduced an additional allowance that will eventually result in an extra tax free allowance of £175,000 for an individual person or £350,000 for a married couple (including those in a civil partnership). This can only be used against the value of your property and only applies in certain circumstances.
As well as the tax free allowance described above (known as the Nil Rate Band), there are also a number of other exemptions that may reduce the value subject to IHT. However, it is always worth checking with a Solicitor as the exemptions do not always apply.
What to do if you believe you may have to pay IHT
As this can be a very complex area, the first step is to speak to a professional that specialises in Inheritance Tax.
Many people treat financial advice and legal advice as separate issues. However, in many ways they are two sides of the same coin. Years of careful financial planning can be undone very quickly by IHT, especially as it is currently charged at 40%. In many cases, IHT can be avoided altogether through careful planning. Equally, there is no point planning to avoid IHT if it will leave you destitute and unable to enjoy the proceeds of your hard work.
Speak to a Solicitor
Your Solicitor will assess your potential IHT liability and will provide you with an estimate of the tax due in the event of your death.
They will discuss your aims (for example, to identify the people to whom you wish to leave your assets) and provide you with the most suitable options to meet your aims.
Speak to your Financial Advisor
After discussing your options with a solicitor, it is always a good idea to inform your financial advisor. They will let you know how the IHT saving plans impact your day to day finances and if the options are compatible with your overall financial planning strategy.
Once you have made reviewed the available options and made your decision, your Financial Adviser and Solicitor will put your plans into action.
It is important to review your Inheritance Tax position on a regular basis to ensure your planning is up to date. This is especially important if you acquire assets that qualify for IHT exemptions as relatively minor changes in your circumstances can cause exemptions to be lost.
To arrange a discussion about Inheritance Tax planning, please get in touch with Paul Clark on 01625 523 988 or mail@JBGass.com