A more in depth look at Inheritance Tax (IHT)

Please note: Neither the information given in the “Brief introduction to Inheritance Tax (IHT)” above or in this summary below of the rules and regulations applicable to IHT represents a definitive guide. It should not be relied on or used to calculate any tax liability, without taking advice from an Independent Financial Adviser or your legal representative.

IHT was introduced in 1986. It replaced Capital Transfer Tax which had been in force since 1975 as a successor to Estate Duty.

IHT is levied on all assets, less deductible liabilities, of the deceased persons estate transferred on death and on;

• All gifts made by individuals within 7 years of death or up to 14 years if gifts have been made to discretionary trusts; or
• Other relevant property trusts; or
• To companies, such transfers are chargeable at the time the gift is made, at half the rate on death i.e. 20%; and
• All gifts made at any time, where there is a reservation of benefit, which continues within 7 years of death (such transfers become chargeable at the time of death).

Not all transfers and gifts are subject to IHT. Those that are not are known as Exemptions, Potentially Exempt Transfers (PETs) and Reliefs. Some of the main exemptions include:

• Transfers between spouses (subject to some limitation if the transferee is domiciled abroad); and
• Transfers between Civil partners (from 5^th December 2005); and
• Transfers on death, if the value of the estate is up to and including £325,000, the Nil Rate Band (NRB); and
• Transfers to qualifying charities and political parties.

There are some annual exemptions for lifetime gifts:

• Small gifts up to £250 – You can give as many gifts of up to £250 per person as you want during the tax year as long as you have not used another exemption on the same person.
• Not exceeding £250 to each recipient,
• From April 2017, subject to certain conditions, an additional inheritance NRB is available when a main residence is passed on death to direct descendants.

Exempted gifts:

• Annual Exemption – You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. You can carry any unused annual exemption forward to the next year – but only for one year.

In addition, each tax year, you can also give away:

• In consideration of a wedding or civil ceremony: gifts of up to £1,000 per person, £2,500 for a grandchild or great-grandchild and £5,000 for a child;
• Normal gifts out of your income – for example Christmas or birthday presents – however, you must be able to maintain your standard of living after making the gift;
• Payments to help with another person’s living costs – such as an elderly relative or a child under 18;

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

• The 7-year rule (also known as a Potentially Exempt Transfer, PET) – If the donor makes a gift, it remains within the donor’s estate for 7 years, after this time the gift no longer forms part of the donor’s estate and there’s no Inheritance Tax to pay. However, if the donor dies within 7 years of making the gift, it becomes a “Failed PET”.
• A Failed PET – If the value of the gift is less than the current NRB, then the gifts value will form part of the NRB and no inheritance tax will be due, if however, the value of the gift exceeds the NRB, then that part of the value up to the NRB will be charged at 0% and the excess over the NRB is charged at 40%, on gifts given in the 3 years before death. For gifts made 3 to 7 years before your death are taxed on a sliding scale, known as ‘taper relief’. Please see table below:

Reliefs

Subject to certain conditions, the value of agricultural property and business assets, including unlisted shares or securities, is reduced by 100 per cent or 50 per cent, according to the nature of the interest transferred, and tax is assessed on the reduced value.

Please contact LR Connections on 0345 314 8972 for an appointment to discuss how we could help you.