There are some reliefs and exemptions that can reduce the value of one’s estate.
Even if there is no inheritance tax to pay, people may need to complete some inheritance tax forms.
Estate and tax planning is a complex area, so Britons are encourgaed to always get professional advice so they can avoid common mistakes when making a gift.
Inheritance tax (IHT) is the tax that is paid on someone’s estate when they pass away. All money, property and personal possessions form part of a person’s estate. The value of the estate will ascertain whether any IHT is payable.
The current rate of IHT is 40 percent and is only charged on the part of the estate that is above the threshold, also known as the nil-rate band. Everyone has a nil-rate band which is currently set at £325,000 until April 5, 2028.
If someone owns a property on their death, their estate can also benefit from the residence nil-rate band if ultimately the property is being left to your direct descendants, such as children or grandchildren.
The residence nil-rate band is currently £175,000. This means, someone’s own personal threshold could boost to £500,000.
Exemptions
Married couples
Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die. In other words, the surviving spouse can inherit the entire estate without having to pay IHT.
They can also pass on their unused tax-free allowance to their surviving spouse or civil partner.
Annual exemption
Everyone has an annual exemption of £3,000, meaning they can give away a total of £3,000 worth of gifts each year, whether to one person or split between multiple people, without them being added to the value of the estate. They can carry an unused annual exemption forward for one tax year only.
Gifts worth less than £250
People can give as many ‘small gifts’ up to £250 as you want each tax year, so long as they have not used another allowance on the same person.
Gifts to Charities
All gifts to UK Registered Charities are exempt from IHT.
Gifts for the maintenance of family
Any gift for the maintenance of a child who is either under 18, over 18 but in full time education or training, or is dependent upon indidivualds because they are physically or mentally disabled, will be exempt from IHT. The gift must be reasonable for the child’s needs.
Lifetime exemptions
Potentially Exempt Transfers – Unlimited amounts can be given to individuals and these will be exempt provided the donor survives the gift by seven years.
Taper relief, reducing the amount of tax payable, may be available if the donor does not survive the full seven years. The donor must not “reserve a benefit”.
This means that he must not continue to benefit from the item given away. If he does then he will need to pay full market rent for any occupation or use if a gift with reservation is to be avoided.
Reliefs
These may reduce the value of the gift/transfer for IHT purposes by either 50 percent or 100 percent – 100 percent relief effectively makes the assets exempt from IHT.
Business Property Relief
Most shares in private trading companies, or interests in unincorporated businesses as either a sole proprietor, or as a partner, will acquire 100 percent business property relief (“BPR”) and so, in effect, be exempt from IHT.
If assets are used in the business but owned outside the business by a proprietor or shareholder, or by a trust in which he is a life tenant, then 50 percent BPR will usually be available.
Agricultural Property Relief
Agricultural land, together with farm houses, cottages and other farm buildings of “a character appropriate” to the agricultural land may acquire Agricultural Property Relief (“APR”) either at 100 percent, and so, in effect be exempt from IHT, or at 50 percent.
There are complex rules associated with both of these reliefs, however, so it is essential that you take advice early to ensure that you qualify.
