Planning

Inheritance tax explained

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Proper planning can help minimise the inheritance tax you pay

The Roman Emperor Caesar Augustus broke new ground when he introduced Inheritance Tax (IHT) to provide retirement funds for the military. A modest charge of 5% was levied on inheritances, except legacies left to spouses and children.

Today the tax is still with us and most people can leave as much as they like to a spouse or registered civil partner, but there may be tax to pay if they leave their estate to other family or friends. However, not everyone pays inheritance tax. It only applies if the taxable value of your estate when you die is above £325,000. Your estate is made up of assets you own less any debts and includes gifts made within seven years of death.

Most gifts made more than seven years before your death are exempt from inheritance tax

Your tax-exempt allowance

After deducting the current IHT allowance of £325,000 from your estate, tax is payable at 40%, this threshold is to stay at this level until 2015/16.

From April 2012, a reduced rate of IHT of 36% was introduced where 10% or more of the net estate is left to charity.

IHT can also be payable on assets you've given away during your lifetime, including property, possessions, money and investments.

Inheritance tax exemptions

There are a number of exemptions which allow you to pass on assets (during your lifetime or in your will) without any inheritance tax being due including:

  • If your estate passes to your husband, wife or civil partner and you are both domiciled in the UK, you don't need to pay IHT even if it's above the £325,000 nil rate band.
  • Most gifts made more than seven years before your death are exempt.
  • Additional exemptions exist allowing you to make monetary gifts on occasions such as the Wedding of your child or grandchild within certain limits.
  • Regular gifts from income are also exempt, providing there is no impact on the donor's standard of living. In addition there is also an annual tax exemption of £3,000 available to each donor.
  • You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year.

Before the Budget changes in 2012 if your spouse or civil partner was not UK domiciled then the exemption was limited to £55,000. The changes mean that the cap could be increased to the current exemption limit (pending consultation) at the time of the transfer, and the Government has also indicated that individuals domiciled other than in the UK and who are married or in a civil partnership will be able to elect to be treated as UK-domiciled for IHT purposes.

Inheritance tax can be a complicated area with a variety of solutions available. Effectively placing funds into trusts and transferring assets is often a question of correct timing. It's best to seek advice in order to fully understand the tax implications of these actions.

The value of tax treatment will depend on your individual circumstances and may be subject to change in the future.

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