Few taxes are quite as emotive or as politicised as Inheritance Tax, which was once confined to the very wealthy but today is no longer the case. Even families and individuals with a relatively moderate level of wealth may need to plan ahead to ensure that their assets are passed on to their loved ones as efficiently as possible.
Size matters
Effective Inheritance Tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate. At its simplest, Inheritance Tax is the tax payable on your estate when you die if the value of your estate exceeds a certain amount.
Inheritance Tax threshold
Inheritance Tax is currently paid on amounts above £325,000 (£650,000 for married couples and registered
civil partnerships) for the current 2015/16 tax year, at a rate of 40%. If the value of your estate, including your home and certain gifts made in the previous seven years, exceeds the Inheritance Tax threshold, tax will be due on the balance at 40%.
Without proper planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate passing to their chosen beneficiaries.
Exempt from Inheritance Tax
Any gifts between husbands and wives, or registered civil partners, are exempt from Inheritance Tax whether they were made while both partners were still alive or left to the survivor on the death of the first. Inheritance Tax will be due eventually when the surviving spouse or registered civil partner dies if the value of their estate
is more than the combined tax threshold, currently £650,000.
If gifts are made that affect the liability to Inheritance Tax and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift.
Calculating tax payable
In most cases, Inheritance Tax must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Inheritance Tax on some assets, including land and buildings, can be deferred and paid in instalments over ten years. However, if the asset is sold before all the instalments have been paid, the outstanding amount must be paid. The Inheritance Tax threshold in force at the time of death is used to calculate how much tax should be paid.
Inheritance Tax is a complicated area with a variety of solutions available, and without proper tax planning, many people could end up leaving a huge tax liability on their death, considerably reducing the value of the estate passing to chosen beneficiaries. So without Inheritance Tax planning, your family could be faced with a large tax liability when you die. To ensure that your family benefits rather than the Government, it pays to plan ahead. As with most financial planning, early consideration and planning is essential.
“If gifts are made that affect the liability to Inheritance Tax and the giver dies less than seven years later, a special relief known as ‘taper relief’ may be available. The relief reduces the amount of tax payable on a gift”
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