Inheritance tax

If you have concerns tax planning is essential

Inheritance tax (IHT) is something most people do not worry about but probably should do. For those with concerns tax planning is essential.

You only have to begin paying IHT at a certain point. The 2008/2009 threshold for married couples and those in civil partnerships is now £624,000 following the Chancellor’s announcement in his pre-Budget Report last October.

For individuals the threshold remains at £312,000, but this will rise over the coming years to £350,000. The joint married couples IHT limit will be raised to £700,000 from 2010.

If the value of your estate, including your home and certain gifts made in the previous seven years, exceed this figure, tax will be due on the balance at 40 per cent.

A person’s estate includes everything owned in their name, including the share of anything owned jointly, gifts from which they keep back some benefit, such as a home given to a son or daughter but still lived in by the parent and assets held in some trusts from which they receive an income.

Against this total value is set everything that the deceased person owed, such as, any outstanding mortgages or loans, unpaid bills, and costs incurred during their lifetime for which bills have not been received, as well as funeral expenses.

Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called ‘potentially exempt transfers’ and are useful for tax planning.

Money put into a ‘bare’ trust, a trust where the beneficiary is entitled to the trust fund at age 18, counts as a potentially exempt transfer, so it is possible to put money into a trust to stop grandchildren, for example, having access to it until they are older.

However gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold suffer no tax but amounts over are taxed at 20 per cent with a further 20 per cent payable if the person making the gift dies within seven years.

Some cash gifts are exempt from tax regardless of the seven-year rule. They include: wedding gifts of up to £5,000 to each of your children, wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else. Other gifts include up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year), gifts of up to £250 each to any number of people each year, gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations.

Regular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as the giver still has sufficient income to maintain their standard of living.

Any gifts between husbands and wives are exempt from IHT whether they were made while they were both still living or left to the surviving spouse on the death of the first. Tax will be due eventually when the surviving spouse dies if the value of their estate is more than the combined tax threshold, currently £624,000.

In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years.

Though if the asset is sold before all the instalments have been paid the outstanding amount must be paid. The IHT threshold in force at the time of death is used to calculate how much tax should be paid.