PRESERVING THE INHERITANCE IHT has some unique features and may be charged on some lifetime gifts, not just on an individual’s death estate. In addition, the threshold for paying IHT (also called the nil rate band) is currently frozen at £325,000 until April 2028 and has been at this level since 2009/10. Therefore, increasingly more estates are falling within the charge to IHT.
• small gifts not exceeding £250 in total per donee per tax year • gifts made out of surplus income that are typical and habitual • gifts made in consideration of marriage up to £5,000 if made by a parent, £2,500 by grandparents and £1,000 by others • gifts to charities, whether made during lifetime or on death • gifts between spouses and registered civil partners, whether made during lifetime or on death. Note that spouses/civil partners each have their own exemptions. Planning in lifetime If possible you should make absolute gifts in your lifetime. A gift to an individual will be a PET so there will be no liability if you survive seven years. Even if you fail to survive for all of that period there may be a tax saving because the charge which will arise on the PET will be based on the value of the asset when it was originally gifted and not on the value at the date of death. If the value of the gift is below the threshold there will be no charge on the PET but the gift will use up some of the nil rate band (NRB) on death. This means that there may be more tax to pay on the assets still in the estate on death.
• Many lifetime gifts are treated as ‘potentially exempt transfers’ (PETs). So long as the donor lives for at least seven years after making the PET there will be no possibility of an IHT charge whatever the size of the gift. • There are numerous exemptions and reliefs. So what’s the problem? IHT is still a problem because: • Many are simply not in a position to make substantial lifetime gifts because it will leave them with insufficient capital to live on. As a consequence there is likely to be significant value retained in estates on death. • Despite the introduction of the residential property nil rate band, which gives some measure of relief, many individuals have a home which will use up the bulk of the nil rate band and any excess remaining assets, such as investments and cash reserves, may be charged to IHT at 40%. Mitigating the liability Do not waste your exemptions. Regularly using IHT exemptions will build up funds outside of the estate without incurring an IHT liability. The main exemptions are: • an annual allowance of £3,000 per donor per year (can be carried forward for one year only if unused)
Planning to minimise IHT is something that many put off until it is too late and early attention to this tax is almost always worthwhile. Practical tip If you die without a Will, the intestacy provisions will apply and may result in your estate being distributed in a way you would not have chosen. Keep your Will up to date to reflect changes in the family situation. In particular, Wills need to be reviewed and amended as necessary on marriage/civil partnership or on divorce. The precise position depends on whether English or Scottish law applies. Key features • IHT is charged on a person’s estate when they die and on certain gifts made during their lifetime. • The rate of tax on death is 40% and 20% on lifetime chargeable transfers. The first £325,000 is not chargeable.
Preserving The Inheritance
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