What is Inheritance Tax?

Inheritance Tax (IHT) is a tax on the estate of someone who has died, including all property, possessions and money. The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the tax-free threshold which is currently £325,000, or £650,000 for a married couple

Who pays Inheritance Tax?

If there’s a will, it’s usually the executor of the will who arranges to pay the Inheritance Tax. If there isn’t a will, it’s the administrator of the estate who does this.

IHT can be paid from funds within the estate, or from money raised from the sale of the assets. It must be paid by the end of the 6th month after the persons death or HMRC will start charging interest.

What is the 7 year clock?

If you give away money by way of a gift or putting assets into trust, that transaction starts a 7 year clock. During these 7 years the gift remains in your estate, and thereafter outside. IHT payable during the 7 years; the first 3 years would be paid at 40%:

• Year 4 – 32%
• Year 5 – 24%
• Year 6 – 16%
• Year 7 – 8%
• Year 8 – 0%

How can I reduce the amount of tax paid?

• Annual gift allowance of £3,000: you can give away up to £3,000 each year without it being added to your estate.
• Gifting to charity in your will: money left to a qualifying charitable body would be exempt from IHT. Furthermore, if this were to represent at least 10% of the net estate, the tax payable on the rest would be reduced from 40% to 36%.

• Gifts that are worth less than £250 to as many individuals as you like. Although not to anyone who has already received a gift of your whole £3,000 annual exemption.

• Wedding gifts: it must be made before not after the wedding; given to child and is worth £5,000 or less, grandchild and is worth £2,500 or less, friend or relative and is worth £1,000 or less.

• Gifts from surplus income: for example, paying into a child’s savings account. You must have enough income to sustain your usual standard of living, any income over this can be classed surplus.
• Potentially Exempt Transfer: this refers to the 7-year clock mentioned previously. A gift of an unlimited amount could become exempt from IHT if the individual survives 7 years. This gift could be a direct monetary gift or a transfer to a Trust for example. There are different types of trust, but to be exempt from IHT, the capital value must be a gift on day one with no prospect of return, although an income can be setup to pay the original donor.
• Life Insurance: Taking out a life insurance policy to pay some or all of an Inheritance Tax bill can make things easier on your family when it comes to sorting out your estate after your death. Generally, these plans have no cash in value at any time and will cease at the end of the term. If premiums are not maintained, then cover will lapse.

It can help protect your home and other assets from having to be sold to pay an IHT bill, which must usually be paid before probate is granted. This gives you the peace of mind that you’re not leaving your family and friends with a hefty tax bill to pay when you die. The policy must be written in trust otherwise it will form part of the estate and increase the problem. This can however be a very expensive solution.

Grant

Director and Independent Financial Adviser

This article is for information purposes and does not constitute financial advice, which should be based on your individual circumstances.

 

The Financial Conduct Authority (FCA) does not regulate Inheritance Tax Planning or Trust Advice.