Inheritance Tax
What is inheritance tax?
Inheritance tax is a tax charged on the net worth of a deceased person. The first three-hundred thousand pounds, as the law stands at the present time, is free of inheritance tax. But thereafter, inheritance tax is charged at the rate of forty%. There are various exemptions for the inheritance tax. There is a surviving spouse exemption. Everything left to the surviving spouse is exempt from the inheritance tax. Certain types of assets are exempt from inheritance tax. The business assets of a trading company will be exempt from inheritance tax, provided that they qualify with certain strict requirements. And again, farmland may be exempt from inheritance tax. But again, there are some overriding requirements.
Are there any exemptions from inheritance tax?
Yes, there are persons who are exempt. Surviving spouse is exempt from inheritance tax. Everything left to the surviving spouse is exempt. There's a nil rate band, which is presently 300,000 pounds. So that the first 300,000 pounds of an estate is exempt. Thereafter the inheritance tax is charged at the rate of 40%. There are assets, which are exempt from inheritance tax. The main ones are business assets of a trading company and farmland, used for agriculture. There are certain requirements both for farmland and for business assets that have to be complied with in order for the exemption to apply. And then there's gifts. You can give 3000 pounds a year away and that doesn't come into the inheritance tax calculation. And also there is the seven year rule - that if you make a gift and you don't reserve a benefit, once you outlived the date of that gift by seven years, that gift will be outside the inheritance tax calculation.
Who has to pay the inheritance tax bill?
With inheritance tax, inheritance tax is charged on the assets of the deceased person. The executors are responsible for paying the inheritance tax out of the assets of the deceased person. So, it may be that they will have to sell assets in order to raise money to pay inheritance tax. The executors have a personal liability and the executors will be unwilling to distribute the estate until they have a final discharge from the inheritance tax office that all the inheritance tax has been paid.
What if I can't afford the inheritance tax?
Inheritance tax always is affordable, because it's charged on the estate. Inheritance tax is payable out of the assets of the estate. Assets are liquidated and the inheritance tax is paid. You may have a personal liability as an executor if you don't pay the tax properly, but that money always should be there because it is charged on the net worth of the estate.
Can I pay the inheritance tax in installments?
When it comes to inheritance tax, inheritance tax can be paid by installments. There is the free estate, which is bank accounts, stocks and shares, whatever, the general assets of a deceased person. The inheritance tax on all of those assets has to be paid up-front at the rate of 40 percent on the excess of 300,000 pounds. When you get to land assets and business assets, then you can pay inheritance tax by installments on the value of those assets. It can be paid over 10 years, in tenths. But, immediately the asset in question is sold, then all the remainder of the inheritance tax due, in respect to that particular asset, is then payable immediately.
Can I avoid paying inheritance tax?
With inheritance tax, you can avoid pay it by mitigating inheritance tax. You can make the burden less with tax planning. The present Chancellor has done his best to stop some of the schemes that were being used to mitigate inheritance tax, but perhaps the most widely used scheme which is relevant to the average man in the street and his wife or civil partners is the Nil-Rate Band Discretionary Trust. In the average will for husband and wife partners, the wills say, “I leave everything to surviving spouse/partner”, but, if there's no surviving spouse (i.e. on second death) then everything is to be divided amongst the children. The inheritance tax effect of that is that on the first death because of surviving spouse exemption there is no inheritance tax payout at all. But, on the second death, the surviving spouse has his or her Nil-Rate Band which is presently 300,000 pounds, and above that, inheritance tax is charged at 40% on the excess. Now in the example that I've described, what the tax-payers have failed to do is to take advantage of the Nil-Rate Band which might have been available on first death had they considered it. Now I won't get into full details of a Nil-Rate Band Discretionary Trust, but the object of a Nil-Rate Band Discretionary Trust is to preserve the Nil-Rate Band that was available on first death and hold it over to second death. So, in taxation terms on the second death there are two Nil-Rate Bands available which would total 600,000 pounds as opposed to just simple 300,000 pounds.
Can I reduce the inheritance tax that will be charged on my assets?
With inheritance tax you can reduce the inheritance tax charged on you assets. There are a lot of seams available, but in general terms you should see your solicitor or account to discuss with him how best to plan the distribution of your assets to whom so ever you want to distribute them to.
Why do I have to pay inheritance tax?
You have to pay inheritance tax because the state requires it, in the same way as they require us to pay income tax.
How will my debts affect my inheritance tax?
Debts do affect inheritance tax; the stage is reduced by the amount of the debts unpaid, the inheritance tax is on the net worth. For example, if you have a house which is worth 200,000 pounds and you have a mortgage which is worth 60,000 pounds, you are to pay tax on 140,000 pounds on worth of that asset.
What is a 'gift'?
Talking of what is a gift in terms of inheritance tax; a gift is a gift. It's just plain everyday common sense to give somebody something. In order for it to be outside the realms of inheritance tax certain rules have to be complied with, or requirements have to be complied with. You can give away up to £3,000 a year and that is exempt from inheritance tax. Then the first year that you make the gift of £3,000, you've got one year carry forward, so that in the first year you can make £6,000 of gifts but thereafter it's £3,000 even if you don't use up the whole of the £3,000 in one year there's no carry forward. Also, you can make gifts, reasonable amounts, up to £250 out of income because of inheritance taxes; a tax on capital, as opposed to income, but if you make gifts of £250 or so, those are outside of the realms of inheritance tax. There are also out and out gifts; you can give a house to somebody if you were that wealthy, but you would have to live 7 years beyond the date of the gift and you could not put any restriction with the gift; it would have to be an absolute gift: what the law calls a potentially exempt transfer - absolutely a gift, no strings attached. If you make a gift and you attach restrictions to it, a gift with reservation of benefit then however long you live after that gift, the value of that gift is not outside the inheritance tax calculation.
Is a gift exempt from inheritance tax?
A gift is going to be exempt from inheritance tax provided you survive for seven years beyond the date of the gift and you don't reserve any benefit to yourself when making the gift.
How do I go about giving someone a gift for inheritance tax purposes?
When you are giving a gift and you are bearing in mind the fact that you want to mitigate the burden of inheritance tax on your estate, it's probably best to have it documented. Obviously if you transfer a house or something similar, it's going to be documented at the land registry, dates and everything else that is prudent. But if you give cash, it might not be so well documented. So it might be best if you asked the person receiving it to give you a receipt for the gift so it's all date stamped and you can prove it to the revenue.
What is the affect of giving a beneficiary a gift?
Provided that the criteria are satisfied - if it's a seven year gift, the deceased survived longer than seven years after making the gift, and there was no reservation of benefit to the deceased - then the estate is reduced by that amount, for inheritance tax purposes. If the gift was a hundred thousand pounds, and it comes out of the inheritance tax calculation. As inheritance tax is payable at forty percent, that means there's a saving of forty thousand in inheritance tax that would have otherwise affected the size of the beneficiary's entitlement.
How will any gifts I have given be declared when I die?
When somebody dies you have to lodge an inheritance tax return with Her Majesty's Customs and Revenue Office, with the Capital Taxes Office. There is a question which says “did the deceased make any gifts within the seven years prior to the date of death?” It's the duty of the executors to establish whether there were any such gifts, and to include their value in the calculation.
