The position regarding inheritance and will tax has been subject to a degree of change as a result of the preliminary report of October 9, 2007. This article is intended to provide you with a balanced view of the changes that were implemented.
The situation before October 9 The basic inheritance tax situation for married couples and civil partnerships before October 2007 was fairly straightforward. The threshold for inheritance tax is £ 325,000 (tax year 2009-2010), and the balance may be taxed at 40%. If the first spouse died and left everything to the survivor, on the first death there would be no inheritance tax payable, due to the availability of the spouse’s exemption. However, in this situation, the first-to-die zero rate band had not been fully utilized. With the survivor owning all the assets, there was a pooling effect which meant that at their death, there could be a substantial inheritance tax bill, as they only had their own inheritance tax threshold to contrast with the pooled properties. .
The situation after October 9 For second deaths that occurred after October 9, 2007, the inheritance tax impact of the property ‘bundling’ at the time of that death can be reduced by the survivor’s Enforcers by making a ‘transfer claim’ to the tax office. The effect of this statement is that the portion of the unused zero rate band in the equity of the first to die can be recovered for the benefit of the second estate. A transfer claim would involve determining the proportion of the unused zero rate band of the first to die and then transferring that which will be established against the taxable value of the survivor’s estate. The effect of this is that if none of the zero rate band had been used on the first death, the survivor’s estate could claim the full value of their unused zero rate band. Which means, in effect, that the zero rate band available to the second state would be £ 650,000 (£ 325,000 x2).
It should be remembered that the inheritance tax threshold has not been increased to £ 650,000.
Annual exemption Each individual can transfer assets up to £ 3,000 pa, which will be exempt from IHT. Transfers can also be made using the prior year’s exemption if it was not used during the prior year.
Small gifts Gifts of up to £ 250 can be made each year, during a person’s lifetime, to any number of recipients. Gifts cannot be part of larger gifts and do not include gifts to trusts.
Normal Expenses Out of Income Regular gifts made with income that do not reduce the donor’s standard of living are also exempt from IHT.
A frequent use of this exemption, and also the annual exemption of £ 3,000, is to pay regular premiums to life insurance policies organized under trust for children or grandchildren. This is a very efficient way to transfer regular amounts using exemptions.
Gifts for education or support Transfers to donor children who are under 18 years of age or in full-time education, or provision for a dependent family member, are exempt, provided they are considered reasonable.
Wedding Gifts Gifts up to specific levels may be made in the marriage that will be exempt from IHT.
Gifts to charities, political parties, or for national benefit Gifts to charities, political parties, or for national benefit are exempt from IHT.
Business or agricultural assets The value of some business and agricultural assets may be totally or partially reduced. For more details, contact us.
Insurance policies You can take out an insurance policy to cover the tax liability in the event of death.
Who pays for the IHT and when is it due? The tax is paid by the personal legal representatives of the deceased. It expires 6 months after the end of the month in which the death occurred. However, personal representatives cannot obtain the authority to manage the estate until the IHT has been paid, so in practice it is often paid before the due date.