Taxing issue of inheritance
OVER the past few weeks there has been a lot in the news about inheritance tax, but not that many people understand the complex rules about this. ●● What is inheritance tax?
Inheritance tax is payable on the estate of a person who has died if the value of the estate, including certain gifts made within seven years of death, is over a certain threshold, also known as the nil-rate band. ●● What is an estate?
An estate is made up of everything owned by the person who has died less what she/he owes and certain expenses, for example funeral expenses.
For inheritance tax purposes the estate might also include the value of certain gifts made during the deceased’s lifetime and interests in trusts.
Certain exemptions and reliefs can reduce the size of the taxable estate. ●● Rates and thresholds
Inheritance tax (IHT) is payable at 40 per cent on the amount of the estate above the threshold.
The rate payable may be lower on certain gifts made during the lifetime of the person who has died, due to the operation of taper relief on some lifetime gifts.
Inheritance tax may be payable at a reduced rate if you leave at least 10 per cent of your estate to charity.
The nil threshold £325,000.
The date of death determines which threshold applies.
Special rules apply to the threshold for married couples and civil partners rate band for IHT is if the first person to die has not used her/his nil rate band (see next paragraph). ●● Couples transferring unused inheritance tax threshold
For couples who are married or in a civil partnership, any proportion of the nil-rate band that has not been used on the death of the first spouse or civil partner can be used when the second spouse or civil partner dies, provided the second death occurred on or after October 9, 2007.
It does not matter how long ago the first death occurred. ●● Example:
A dies and his estate passes to B, his wife, free of IHT because transfers between spouses and civil partners are exempt from IHT.
Consequently, he has not used any of his nil-rate band. When B dies, the whole of A’s nil-rate band is available to B, whose nil-rate band is increased by 100 per cent (to £650,000 in 2013/14).
Worked examples of how the transfer works, including when part of the nil rate band has already been used on the first death, can be found at hmrc.gov.uk. ●● Exemptions and reliefs
Some gifts are completely free from (IHT) whether made in the lifetime of the person who has died and are not included in the deceased’s estate when working out if any tax is due.
Gifts to a husband, wife or civil partner, provided her/his permanent home is in the UK.
The amount of the exemption is limited for spouses or civil partners who are not domiciled in the UK.
Gifts to registered charities or to registered amateur sports clubs in the UK.
Certain sums paid out from an occupational or personal pension scheme.
Most gifts to political parties with an MP in the House of Commons.
Gifts to certain national institutions specified by HM Revenue and Customs (HMRC), for example, museums, universities and the National Trust.
Gifts of agricultural land.
Gifts of woodland. The following gifts made in the donor’s lifetime (lifetime gifts) are exempt from IHT even if she/he dies within seven years of making them:
The annual exemption – gifts worth up to £3,000 in each tax year.
This can be a single gift or several gifts adding up to that amount.
Any unused part of the exemption can be carried forward to the following year, but, if unused, it expires after that.
Small gifts – up to the value of £250 to any number of people in any one tax year.
Wedding and civil partnership ceremony gifts - subject to certain limits depending on who is giving the gift.
Parents can each give cash or gifts up to £5,000, grandparents or great grandparents up to £2,500 each, and other people up to £1,000.
For further information about inheritance tax, go to gov.co.uk.