Preserving your wealth for future generations.

While only a small percentage of estates are large enough to incur Inheritance Tax, you mustn’t forget to factor this tax into your plans when you make your will.

Passing on your estate efficiently and effectively can mitigate the burden that unexpected inheritance tax can bring.

Call us on: 020 8509 6899 to speak to our IHT team.

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. There’s normally no Inheritance Tax to pay if:

• the value of your estate is below the £325,000 threshold
• you leave everything to your spouse or civil partner, a charity or a community amateur sports club

However, the default charge if you do not plan for the taxable aspect of your estate is 40%.

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Where you live and Domicile

This section only applies to persons domiciled in the UK.  Domicile is not simply a matter of where you are born or what passport you hold, it is a specialist area of its own, but as a rule of thumb if you have lived in the UK for at least 17 out of the twenty years before you die, Her Majesty’s Revenue and Customs (HMRC) will probably consider you to be domiciled here.  If you are recognised as a foreign domicile then what is below largely does not apply to you.

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Reducing the Burden of Inheritance Tax

Inheritance Tax can be a burden for many estates on death. It may be possible to reduce the amount of tax paid on death with appropriate planning, which requires specialist advice, but there are some general points to bear in mind.

If the total size of your estate after deducting all your debts is currently more than £325,000 for a single person of £650,000 for a married couple then you are potentially liable for Inheritance Tax, which is currently levied at 40%, so for every pound over the above figures that is left in the estate HMRC will take 40p of it in Inheritance Tax.

Annual Exemption

There is annual exemption of £3,000 per person per annum, with the right to carry over one year’s worth of unused annul allowance

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When is the tax paid?

Inheritance Tax is normally paid within six months after the person’s death. If the tax is not paid within six months, HMRC may start charging interest, unless you apply for an extension while you liquidate some of the assets (for example if you need to sell a property to pay the tax bill). There are a number of other options that your solicitors can advise you on to protect you from facing a large bill if the estate is bound up in solid assets. And remember, HMRC will refund the estate if it has overpaid the Inheritance Tax.

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Exemptions for IHT include:

Wedding gifts

• Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:
• Parents can each give cash or gifts worth £5,000
• Grandparents and great grandparents can each give cash or gifts worth £2,500
• Anyone else can give cash or gifts worth £1,000

Gifts limited to £250

You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether.  You also can’t use your small gifts allowance together with any other exemption when giving to the same person.

Gifts from Surplus Income

You can give out of surplus income, which HMRC describes as gifts from ‘after-tax income excluding capital’.  In short if you income exceeds your expenditure to the extent that you can afford to save, instead of saving the surplus you can give it Inheritance Tax free to whomsoever you like, but HMRC will expect the executor to prove these payments were form surplus income.  Subject to that the amount is unlimited and HMRC provide the following examples:

Monthly or other regular payments to someone

• Regular gifts for Christmas and birthdays, or wedding/civil partnership anniversaries
• Regular premiums on a life insurance policy – for you or someone else
• Maintenance payments to your husband, wife or civil partner
• Maintenance payments your ex-spouse or former civil partner
• Maintenance payments relatives who are dependent on you because of old age or infirmity
• Maintenance payments your children, including adopted children and step-children, who are under 18 or in full-time education

PETs

You can give away you assets while your are still alive and so long as you live another seven years and the gits are genuine gifts, not gifts with strings, then the gifts are Inheritance Tax free.   If HMRC thinks the gifts are shams, then they will tax them as part of your estate regardless of how you have done it.  These gifts are called PETs – Potentially Exempt Transfers and are liable to tax on a diminishing basis during the course of the seven years, with no relief given in the first three – which rules out death bed gifts.

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