All your inheritance tax questions answered
NEIL JONES, technical expert at financial giant Canada Life, answers your questions around inheritance tax.
Q ACAN you please tell me what exactly is inheritance tax?
INHERITANCE tax, or IHT for short, is a tax payable on your estate when you die – although it can also be paid on certain gifts you make during your lifetime.
It is one of the most disliked taxes, after all, who wants to think about having to pay a duty or tax on a lifetime of accumulated wealth, especially when the deceased has already paid tax on the income?
But the reality is that only 5% of estates pay IHT and there are things you can do to ensure you minimise your estate’s liability to the taxman.
Q AHOW do I know whether my own estate will face an IHT charge?
IT will depend on the assets you have, and the beneficiary. HMRC will value your estate, which includes your home if you own it, investments, cash and other possessions such as additional properties.
The good news is that married couples and civil partners can pass on their wealth to each other tax-free.
For legacies to anyone else, the first £325,000 is chargeable at 0% IHT. This is known as the Nil-rate Band (NRB), and though it has been frozen for many years, this amount is due to increase next April in line with inflation.
To complicate things, each person could also receive an additional £175,000 to use against their property, so a couple could have a combined threshold of £1m this tax year.
However, conditions apply to this extra amount. Any part of your estate over the NRB may have to pay IHT, normally at 40%.
Q ACAN I give money away to reduce the value of my estate?
IT is perfectly legal to gift money. You can gift up to £3,000 a year without any IHT implications. In certain circumstances, such as one of your children getting married, you can gift up to £5,000.
Regular gifting of surplus income can be a tax-efficient way of passing on your wealth, providing you don’t put yourself in financial jeopardy and stick to the rules.
If you give larger cash gifts, the seven-year rule applies, which means that if you die within seven years of making the gift, it will be included in your IHT calculation.
HMRC applies a sliding scale of tax, so after seven years it reduces to zero.
However, if these gifts are within the £325,000 NRB, the tax would be zero. Different rules apply when money is put into a trust.