What is inheritance tax?
Inheritance tax (IHT) is a sum that is calculated on the value of your Estate when you die. Fortunately, Professional Financial Centre can help you to reduce your exposure to IHT and cut the amount that you might be liable to pay.
In fact, IHT is often referred to as a voluntary tax because with planning, your IHT liability can usually be significantly reduced or avoided.
What rate of IHT is charged on death?
IHT is not charged on the first £325,000. This is known as the ‘nil rate band’. IHT is charged on the excess at 40%.
Mr and Mrs Smith’s estate is valued at £750,000. Without IHT planning the IHT will be £40,000.
Value of estate £750,000
Nil rate band (£325,000 x2) £650,000
Estate subject to IHT £100,000
Inheritance Tax (£100,000 x 40%) £40,000
Mr Jones has 3 children and his estate is worth £1,800,000. Without IHT planning the taxman will receive more than each of his children. (Mr Jones’ wife passed away and he inherited her full nil rate band of £325,000).
Value of estate £1,800,000
Nil rate band (£325,000 x2) £650,000
Estate subject to IHT £1,150,000
Inheritance Tax (£1,150,000 x 40%) £460,000
Inherited by each of his children £446,666
Frequently asked questions
Who pays the IHT? – The legal representatives of the deceased person pay the tax. It is due 6 months after the end of the month in which death occurs. The personal representatives are not able to release the assets of the estate until the IHT has been paid, so in practice it is often paid before the due date.
Can I give assets away to avoid IHT? – You can make gifts of unlimited value (except to discretionary trusts). If you live for 7 years after making the gifts they will not be included in your estate. If you die within 7 years they will be taken into account, for IHT purposes.
Can I Give benefit from assets that I give away? – Generally speaking, if you are still able to benefit from assets that you have given away, the assets will be treated as if you still own them for IHT purposes. On your death the value of the gifted asset will be aggregated with the value of your estate to determine the IHT. For example, if you give your home to your children but continue to live in it, your home would be treated as if you still owned it for IHT purposes.
Trusts – retain access and control
Using trusts can enable you to retain control and access to your capital, whilst potentially saving significant amounts of IHT.
Investments can be rearranged to enable you to receive an income from them whilst achieving a significant immediate reduction in your IHT liability. After 7 years the value of the investments will not be taken into account when calculating your IHT liability.
If you have surplus assets, making gifts is one of the most effective ways of reducing a potential IHT liability, particularly where the gifts fall within the IHT exemptions or where you expect to live for 7 years after making the gift.
Gifts and Long Term Care Planning
The majority of people would like to make gifts to their children or grandchildren, but feel that they need to keep up their capita – just in case they become unable to care for themselves and have to pay for their care. A great solution is to arrange a Long Term Care insurance plan that will pay for your care, if needed. This can enable you to make gifts secure in the knowledge that you have made appropriate provision for your future care costs.
A Life Assurance policy can be arranged under Trust for the benefit of your children, grandchildren or other beneficiaries. This can provide them with the funds to meet the IHT liability on your death and enable your assets are released.
Please note that this fact sheet is intended to be a summary of the main aspects of this topic and is not exhaustive of the issues involved, it is also not a recommendation and you should obtain appropriate legal and/or financial advice before acting on any of the information provided.