Inheritance Tax Planning

What is Inheritance Tax

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IHT is basically a form of death duties - the tax charged on what you leave behind when you die. Broadly speaking this is everything you own at the time of your death, minus what you owe.

To sum it up this is a fee charged by the government for allowing you to leave at least some of your wealth to your heirs when you have died.

Not everyone pays IHT, when you die 40% of the value of all the assets you leave behind on death apart from the first £325,000 for 2011//12 will be taxed.

There are also a number of exemptions which allow you to pass on amounts (during your lifetime or in your will) without any IHT being due, for example:-

• If your estate passes to your husband, wife or civil partner and you are both domiciled (living) in the UK there is no IHT to pay even if it is above the £325,000 nil rate band.
• Most gifts made more than seven years before your death are exempt.
• Certain other gifts, such as wedding gifts and gifts in anticipation of a civil partnership up to £5,000
  (depending on the relationship between the giver and the recipient), gifts to charity and £3,000 given away
  each year are also exempt.

Calculating IHT

The basic calculation again, of IHT, is simple - value all the assets that are left behind on death, add them up, knock off £325,000 and tax what's left at 40%.

Basic IHT Planning

Many will have spotted that you can avoid IHT entirely by leaving all your property to your spouse. However, this could increase your IHT bill in the long run.

To take a simple example, suppose that both husband and wife each have assets of £300,000. If on husband's death his share is left entirely to the wife, there will be no IHT. But when wife dies there will be IHT on £600,000 less £325,000 = £275,000 @ 40% = £110,000.

If the husband had left the £300,000 direct to the children there would be no IHT then or indeed on the wife's death because both nil rate bands would have been used. This is an example of how important it is to use the nil rate band - though practicalities must always be borne in mind.

Gifting Your Home to Your Children

If you want to give your home away to your children while your still alive, you might want to bear in mind that:

• Gifts to your children – unlike gifts to your spouse or civil partner – are not exempt from Inheritance Tax
  unless you live for seven years after making them.
• If you keep living there without paying a full market rent (which your children pay tax on) it is not an ‘outright
  gift’ but a ‘gift with a reservation’ so it is still treated as part of your estate and so liable for Inheritance
  Tax.
• From 6 April 2005 onwards you may be liable to an pay Income Tax charge on the ‘benefit’ you get from
  having  free or low cost use of the property you formerly owned (or provided the funds to purchase).
• Once you have given your home away your children own it, it becomes part of their assets; so if they are
  bankrupted or divorced, your home may have to be sold to pay creditors or to fund part of a divorce
  settlement.
• If your children sell your home and it is not their main home, they will have to pay Capital Gains Tax on any
  increase in its value.

It is also possible to think in terms of giving sums away, surviving seven years and thus getting that gift out of your IHT "reach". This would be known as a Potentially Exempt Transfer (PETs).

A prime example of a PET; If you decided to downsize to a smaller property and give away the proceeds of the sale of the larger property, these gifts may qualify as:

• ‘potentially exempt transfers’ (PETs) so they would not be taxable unless you die within seven years.
• Part of your annual exemption in £3,000 chunks each year

So if you was to give £10,000 away, £3,000 would be exempt under the annual exemption and £7,000 will be a PET.

One factor that should certainly be taken into account, is to make sure you have a proper will. Of itself it won't save IHT, but will at least make sure your assets go where they are intended to and that any IHT planning you have done is effective.

IHT is a tax that can be planned for, at least in terms of its impact. You may not be able to take your wealth with you when you go but you can at least make sure the taxman doesn't get a greater share than he has to!

Who Pays Out Inheritance Tax

IHT will have to be paid by someone's executors before they are able to manage their assets and potentially hand them on to the beneficiaries. If you die without leaving a will a court can nominate the personal representative, in which case they will be known as the ‘administrator’.

Valuing the Estate for Inheritance Tax Purposes

If you have been nominated as someone’s executor you have to value all of the assets that the deceased person owned. This valuation must accurately reflect what the assets would reasonable fetch in the open market at the date of death.

Deadline for Paying Inheritance Tax

In most cases, Inheritance Tax must be paid within six months from the end of the month in which the death occurs, otherwise interest is charged on the amount owing.

Tax on some assets, including land and buildings, can be deferred and paid in instalments over ten years.