Inheritance Tax is usually paid on an estate when somebody dies, however not every estate will be liable for tax. Every individual has an allowance which they can leave free of tax upon their death. This is known as the ‘Nil Rate Band’ which is currently £325,000.00. If the total value of your assets is worth less than this amount at the date of your death, your estate will not have to pay tax. If your assets are worth more than this amount at the date of your death, your estate may have to pay Inheritance Tax on the surplus at the rate of 40%.
There are exemptions and reliefs available (see below). For example, everything that an individual leaves to their spouse or civil partner passes automatically free of tax, following which the surviving spouse or civil partner can take advantage of the unused Nil Rate Band of their deceased spouse or civil partner. 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 £650,000.00 and you leave everything to each other on the first death, no Inheritance Tax will be payable under the current regime.
HM Revenue & Customs are only concerned with your assets over the Nil Rate Band, therefore great care should be taken not only with regard to how your Will is drafted but also how you may hold any joint assets and whether you have any pensions or life policies which can be nominated or put into trust.
The ‘7 year rule’
You should also be aware of the anti-avoidance rules. In summary, any attempt you make to reduce your estate by giving away your assets before your death will generally be subject to a ‘7 year rule’. The rule is that you must survive for a period of 7 years from the date of the gift you make otherwise the value of that gift will be included in your estate for Inheritance Tax purposes on your death. This is subject to certain exemptions and reliefs, which are discussed below.
Please also note that if you give away an asset when it is your intention to keep some kind of interest in that asset, e.g. putting your property in the names of your children but continuing to live in it or investing a large sum of money in your child’s name but maintaining access to the money and/or reserving a right to the income, the value of the asset in question as at the date of your death will be included in your estate for Inheritance Tax purposes, even if the legal title is not in your name. This is called a gift with reservation of benefit. When you cease to have an interest in that asset e.g. in the house example by moving out of the property or starting to pay your children market rent, the 7 years will start from that date.
Exemptions and reliefs
As stated above, there are a number of exemptions and reliefs that are available to reduce or dispense with any Inheritance Tax payable. The main ones can be briefly explained as follows:
Registered Legal Partner Exemption – Any assets passing between spouses or civil partners will be exempt from Inheritance Tax regardless of the amount and whether this is higher than the current Nil Rate Band.
Charity Exemption – Generally any bequests or gifts you make to charities will also be exempt from Inheritance Tax.
Annual Exemption – We are all entitled to give away a certain amount of assets each year before Inheritance Tax becomes due. This is currently £3,000.00. You can also utilise the unused annual exemption of one previous tax year, but no more than this.
Small Gifts Exemption – Gifts not exceeding £250.00 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.
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.