Quick Guide to Inheritance Tax

A brief overview of Inheritance Tax (IHT)

1. Everyone is entitled to the basic Inheritance Tax allowance of £325,000 (“the Nil Rate Band”). You may leave assets in this sum on death or give them away during your lifetime without incurring any IHT.
2. Unless you qualify for one of the other exemptions or reliefs then all assets you own in excess of £325,000 at the time of your death will be taxed at 40%. If you have assets of £500,000 this would mean £500,000 – £325,000 x 40% = £70,000 of IHT due
3. Gifts made within 7 years of your death are also taken into account when looking at the total value of your estate. All gifts made to individuals more than 7 years before your death of any amount are disregarded.
4. Gifts to a trust of any amount are subject to IHT at the lifetime rate of 20%. This is subject to those falling within the Nil Rate Band (“NRB”) or which are otherwise exempt.  So if you put £425,000 into a trust you will pay tax of £20,000 (£425,000 -£325,000 = £100,000 X 20% + £20,000)
5. The Nil Rate Band (“NRB”) regenerates every seven years. So if you give away £325,000, eight years before you die then you will still have a full NRB when you die.  You can put this sum into a trust every 7 years without incurring any IHT liability
6. The “NRB” can be inherited by a spouse (but not by an unmarried partner) on death with the result the surviving spouse can then leave a Nil Rate Band of £650,000.
7. All assets passing between spouses during life and on death are exempt from Inheritance Tax. Provided they are domiciled in the UK.  Being resident is not the same as being domiciled.
8. All references to a spouse apply equally to a civil partner.
9. In addition to the NRB there is a Residence Nil Rate Band (“RNRB”), which is £175,000. This allowance only applies on death and relates to a property you have occupied before death. It must also be closely inherited by a lineal descendant. Lineal descendants include children, grandchildren, stepchildren and foster children.
10. In order for a gift to a grandchild to qualify for the RNRB it must be closely inherited it can not be subject to any form of age contingency i.e. contingent upon them turning the age of 21. They must have an absolute right to the gift. While HMRC will not allow a contingent gift, they will permit a deferred one, however, if the gift is deferred the issue of how it should be dealt with on death must be addressed. We provide therefore that if the child does not reach the deferred age then the assets still pass to their estate in order to ensure compliance with the legislation.
11. Whereas a married person with children and house can leave assets free of inheritance tax of £1,000 000. A single person without children is limited to the NRB of £325,000.
12. We do not give investment advice. The value of stocks, shares and other similar investments can increase and decrease in value. If such investments are held with an AIM company that is a trading company for two years, they qualify for Business Property Relief (BPR) and become exempt from Inheritance Tax.
13. Where an estate is worth more than £2,000,000 the RNRB is reduced at the rate of fifty pence in the pound for every pound of assets over £2,000,000. When calculating the value of an estate all assets are taken into account even those which are exempt from Inheritance Tax.
14. When calculating the availability of the amount of Nil Rate Band which is available all gifts within the period of seven years before the date of death in excess of £3,000 a year are taken into account (excluding gifts of £250).
15. Where an asset is given away but the Donor still continues to receive a benefit from it then they are treated as still owning it for Inheritance Tax purposes. This can commonly arise with a holiday home which the Donor continues to use or where one spouse leaves their share of the family home to the children but the surviving spouse continues to have sole use of the whole house.
16. There are a number of IHT exemptions, the most common of which are:
    • Annual gifts of £3,000.00
    • Unlimited gifts of £250.00 (Can’t be used in conjunction with the gift of £3,000.00)
    • Regular gifts out of surplus income (Must be genuine surplus income and should be documented to ensure the tax relief)
    • Gifts to UK registered charities an unlimited amount
17. Anyone who is domiciled in the UK (domicile is different to resident) will be taxed on their worldwide estate. Your domicile in simple terms is the country with which you have the greatest connection.
18. IHT on property can be paid by instalments of 10% + interest over a ten year period.