15th August 2014 at 10:08am
Are you bothered about inheritance tax? (IHT)
I’ve come across a wide spectrum of views on IHT over the years. Some people view it as a justified tax on wealth. Some feel they’ve had to work hard to earn their money over their lifetime, and want their children to have to do the same and not have too big a cushion of inherited wealth. Others want to do all they can (within the rules) to ensure their loved ones inherit as much of their money as possible.
What do I think?
£3.3Bn was paid on estates in 2013/14. IHT at 40% can be due on estates worth more than £325,000 I believe a big part of the problem with IHT is the (strange) combination of amendments and neglect the rules have been subjected to over the last 30 years. A real overhaul is overdue.
This blog is for you, if you’re looking at how to reduce the impact of IHT on your estate. And I’d always recommend taking expert legal advice if you are making gifts, so you have the full picture about the tax consequences.
More inheritance tax is being paid
Official figures now show that we’re almost back to 2006/7 levels in the amount of IHT paid. £3.3Bn was paid on estates in 2013/14. IHT at 40% can be due on estates worth more than £325,000, when someone dies. It’s usually due on the chunk which is over £325,000.
You can reduce the bill by using an exemption
For the vast majority of people, however, IHT is not an issue. For a start, many people don’t have an estate worth more than £325,000. And even if they do, there’s a list of exemptions which means the majority of estates don’t have a tax bill.
As this table shows, the main reason why an IHT bill isn’t due is because someone leaves their estate to their spouse/civil partner. This then means IHT could be due when the surviving spouse/civil partner dies. In many cases, a bill’s only due if the survivor’s estate is worth more than £650,000. That’s because of the so-called ‘transferable nil rate band’ which you can read more about here.
Living for 7 years
When it comes to making simple cash gifts to reduce the value of your estate, the key thing to know about is the ‘7 year rule’. If you make a simple cash gift, and you live for 7 years after making that gift, its value is not added back to your estate when you die. If you do pass away in that 7 year period, the value of the gift at the time you originally made it is added back to your estate.
There’s no limit on the value of the gift here.
Using your annual exemption of £3,000
You can gift away up to £3,000 each tax year and it’s exempt for IHT. No 7 year clock needed.
You can gift away up to £3,000 each tax year and it’s exempt for IHT. No 7 year clock needed. But it’s hard to get excited about an exemption where the value of it has been frozen since 1981.
If you’ve not used the previous tax year’s annual exemption, it carries forward for one year only – making it £6,000.
Get your paperwork in order
If you are making gifts, you can do your loved ones a big favour by getting the paperwork in order so it’s easier to claim the exemptions when the time comes. This is the form which needs to be filed with HM Revenue and Customs when exemptions are being claimed by an estate, when someone dies. Good record keeping (ie. writing down a note of lifetime gifts) could save your family time, money and tax. There’s nothing to stop you using this form to help with that.
In Part 2, I’ll explain the exemption for regular gifts from surplus income.
If you have any questions or comments, do post below.
This blog and any responses to comments are not financial or tax advice. This blog assumes you and your spouse/civil partner are domiciled in the UK for inheritance tax purposes. You should take expert legal advice before making gifts, to understand the inheritance tax consequences. Tax and legislation can change in the future.