Thursday 10 December 2015

Inheritance Tax: the basics

When you pass away, your estate may be required to pay Inheritance Tax. This is a tax on the money, possessions and other property you own when you die and also other assets including certain gifts made during your lifetime.

Garden House Solicitors, Solicitors specialising in trusts and estatesEveryone has an allowance that they can leave tax free. This is known as the ‘Nil Rate Band’ which is currently fixed at three hundred and twenty five thousand pounds (£325, 000).

Generally speaking, if your net estate is worth less than £325,000 at the time of your death, usually no tax will be payable. If your net estate is worth more than £325,000 at the time of your death then normally tax is paid on the surplus at the rate of 40%.

This is subject to various exemptions and reliefs. For example if you have a spouse or civil partner, inheritance tax would not be paid on anything they inherit from your estate. Your spouse or civil partner could then use the percentage of any remaining allowance from your estate that may not have been used when they pass away. In simple terms, this generally means that if you are a married couple or in a civil partnership with a combined estate worth less than £650,000 and you leave everything to each other on the first death, Inheritance Tax will not be an issue.

When considering Inheritance Tax and tax planning options, it is usually sensible to consider and take into account the property you may own with others, as well as your pension and life policies. A carefully drafted may also limit any inheritance tax being paid unnecessarily depending on the circumstances.

From April 2017, there will be an additional tax free allowance for homeowners where your 'direct descendants' (e.g. children, stepchildren, grandchildren) inherit your home following your death. The technicalities are somewhat complex, however the basic rule is that if you are leaving your home to direct descendants, you will have an additional allowance of £100,000 from April 2017. This is to increase by £25,000 each tax year until April 2020/21.

If you attempt to reduce your estate in order to save inheritance tax by making large gifts before your death, your  estate will generally be subject to the ‘7 year rule.’ This provides that you must live for at least 7 years from the date of a gift otherwise the value of that gift will be included in your estate for inheritance tax purposes (and if any tax becomes payable the beneficiary of the gift may be required to pay any relevant tax). Again, this is subject to certain exemptions and reliefs, which are discussed below.

It is important to be aware of 'gifts with reservation of benefit'. In particular, if you give away an asset away but continue to have an interest in using that asset, for example if you transfer your property into your children’s names but continue to live in it, the value of the property in most cases will still be included in your estate for Inheritance Tax purposes.

As stated above, there are a number of exemptions and reliefs which can be used to counter any Inheritance Tax which may be payable. The most common forms of relief are as follows:

  • Registered Legal Partner Exemption – Anything gifted to/inherited by your spouse or civil partner will usually be exempt from Inheritance Tax regardless of the amount. There are limits to this exemption, for example if your spouse is not domiciled in England and Wales.
  • Charity Exemption – Inheritance tax generally is not payable on any gifts or legacies made to charities. In addition, an estate may be eligible to pay Inheritance Tax at a reduced rate of 36% on some assets (instead of 40%) if 10% or more of the ‘taxable value’ of their estate is left to charity.
  • Annual Exemption – We are all entitled to give away a certain amount of assets each year. This is currently £3,000. You can also utilise the unused annual exemption of one previous tax year if you did not make any gifts in that year. 
  • Small Gifts Exemption – Gifts not exceeding £250 made by you to another individual in any one tax year are exempt from Inheritance Tax.
  • Wedding/Civil Partnership Ceremony Gifts Exemption – Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax subject to certain limits.
  • Normal Out of Income Exemption – Any gifts made out of surplus income (i.e. regular gifts which do not affect your own standard of living) are exempt from Inheritance Tax.
  • Business Property Relief and Agricultural Property Relief – Gifts of business and agricultural interests may be fully or partly exempt from Inheritance Tax depending on the type of interest involved and the particular circumstances. In summary, if you own a business that mainly carries out trading activities (as opposed to investment activities), this will usually be exempt from tax. Agricultural property e.g. farmland and farmhouses may also qualify for relief, but this will depend on various factors. Also note that agricultural property relief can only be applied against the 'agricultural' value of the property in question (as opposed to the full market value). If there is a farming business however, business property relief can usually be claimed on the surplus, but again this would depend on a number of factors. This is a very specialised area and we would advise you to contact us if you have any queries.
  • Tapering Relief – As stated above, most gifts you make within the 7 years prior to your death will be included in your estate for Inheritance Tax purposes. However, where a gift is made more than 3 years before your death, some relief will be available to reduce the rate of tax.

The impact of Inheritance Tax on your estate and the planning options available to you will very much depend on your individual circumstances. We would therefore suggest that if you have any concerns about Inheritance Tax that you discuss it with us if you have not done so already.

If you have any queries relating to Inheritance Tax planning, please feel free to contact Chris Lucas on 01992 422 128 or at

Solicitors specialising in wills, probate and estates

Tel: 01992 422 128

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.

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