Inheritance Tax Information

Today, concerns over Inheritance Tax are shared by more and more people. No longer are issues of Inheritance Tax and Estate Planning concerns of the extremely wealthy. Indeed, many people who view themselves simply as "comfortably well off", or "of reasonable means" need to think seriously about the implications of Inheritance Tax when making their Will.

Although it is illegal to evade paying Inheritance Tax, it is perfectly acceptable and indeed responsible to reduce your Inheritance Tax payments that your Estate might need to pay.

If you believe that your Estate is worth less than £285,000, then you may just find the following information interesting, although you would not need to worry about tax implications as they will not effect you.

What the law allows:

The law allows you to leave an Estate worth up to £285,000 without having to pay any tax upon it. This £285,000 is called the 'Nil Rate Band'. After the first £285,000, or the Nil Rate Band, your Estate will be charged 40% Inheritance Tax for everything else.

Thus, should you leave an Estate worth £350,000 you would be allowed the first £285,000, without having to pay any Inheritance Tax, and then you would be charged 40% on the remaining £65,000. A total of £26,000 Inheritance Tax.

Should your Estate be worth £500,000, then the Inheritance Tax would work out as follows: £285,000 tax free, and then 40% of the remaining £215,000; a total of £86,000 Inheritance Tax.

However, there are several exceptions to Inheritance Tax which can and should be considered if your Estate is worth more than £285,000. These amounts can be taken out of the Inheritance Tax calculation before the tax man looks at your Nil Rate Band.

Gifts up to £3,000 per tax year. If this allowance is not used up in any one year, the unused portion can be carried forward to the next tax year, but not to subsequent years. Thus, in the first year, a gift of up to £6,000 can be made.

Wedding Gifts; parents can give up to £5,000 to a child as a wedding gift, each grandparent can give £2,500 and all other persons can give £1,000.

Gifts up to £250 per person per year. This can be used for as many persons as you wish. Therefore, it would be quite legitimate, theoretically, to potion your whole estate up into £250 portions if you were to know so many people.

All assets given, or left, to a spouse are exempt, unless the spouse is foreign domiciled.

All gifts to registered charities are exempt.

Additionally, Inheritance Tax can also be claimed on gifts that a person has made during the last seven years of their lifetime. The following sliding scale applies to gifts made in the seven years before death.

• Up to 3 years before death: 40%
• Between 3 and 4 years: 32%
• Between 4 and 5 years: 24%
• Between 5 and 6 years: 16%
• Between 6 and 7 years: 8%

Some common methods of avoiding Inheritance Tax

If you are a married couple, one of the simplest and most effective ways of avoiding some Inheritance Tax, is simply to take advantage of two Nil Rate Bands.

If Mr. & Mrs. Smith have a joint Estate worth £600,000, they may upon the death of the first spouse give away to their beneficiaries £285,000 without having to pay Inheritance Tax, thereby utilizing a Nil Rate Band. However, if they do not do this and simply pass the Estate to the remaining spouse, when the Estate is eventually split it will only be allowed a single Nil Rate Band, rather than the two which could have been used.

Example:

Using 2 Nil Rate Bands:

Mr. & Mrs. Smith have £600,000 upon the death of the first spouse. £285,000 is given away free of Inheritance Tax, using the Nil Rate Band, leaving £315,000 to the second spouse. Upon the death of the second spouse, another £285,000 will be allowed free of Inheritance Tax, using the Nil Rate Band, leaving only £30,000 liable to Inheritance Tax at 40%, resulting in an Inheritance Tax of £12,000.

Conversely, using only 1 Nil Rate Band:

Mr. & Mrs. Smith have £600,000. Upon the death of first spouse, all the money is left to the remaining spouse without using the Nil Rate Band. Upon the death of the remaining spouse, only the one Nil Rate Band of £285,000 will be allowed, leaving an Estate of £315,000 liable to Inheritance Tax at 40%, resulting in an Inheritance Tax of £126,000.

There are other ways to avoid some Inheritance Tax which are not as effective. The individual will have to carefully think about how they wish to implement some of the other exceptions mentioned above when making their Will.

Another simple example could be a grandparent making use of the £250 exception. They may have four children, who each have two children. If he or she wished to avoid some Inheritance Tax, they could make direct gifts to the grandchildren up to the £250 limit mentioned above, rather then giving the money to the parents. They would still be able to request that the money was kept in trust for the grandchildren by the parent, but they would thus be able to pass £2,000 to the grandchildren, without having to pay Inheritance Tax upon it.

All that you need to do is understand what exceptions are available, and make it clear in your Will that these gifts are to be given before Inheritance Tax is considered.

If you believe that you Estate is worth up to about £500,000, we would recommend implementing one of our standard Wills, bearing in mind the information in this helpsheet.

However, if you believe your estate to be worth in excess of £500,000 please indicate this on your form, and we can pass on your details to our associates who specialise in Estate Planning and the Reduction of Taxes, for large Estates through Trusts.

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