IHT is never an easy tax in that it raises all sorts of emotional and moral issues, as well as complex technical ones. So tread carefully!
Anyhow, whilst we’d always advise you to consult a professional, here’s some guidelines:
- a) First, bear in mind that you may want to consider your own financial security before planning to mitigate any potential IHT.
- b) Of course, you’ll need to establish whether you may be liable to IHT. This will happen if your estate is worth more than £325,000 (for the tax year ended 5 April 2014) or if you and your spouse’s assets are worth more than £625,000. Your estate may include assets such as your home, bank accounts, shares, but also your liabilities, such as a mortgage or a loan.
- c) Certain assets, such as shares in an unquoted trading company, agricultural property that’s part of a working farm and timber in woodland, are exempt from IHT.
- d) If the value of your estate exceeds the nil-rate band IHT is payable, unless you leave your assets to your spouse or registered civil partner, (where both are UK-domiciled). The question of domicile is not straight-forward and again, best to take professional advice. But you are deemed to be domiciled in the UK, if you have been resident in the UK for 17 out of the last 20 years and, if so, would then be liable to IHT on your word-wide assets.
- e) An example: The value of your home, bank accounts and shares may amount to £1,200,000 and say you have a mortgage of £300,000; your estate would have a net value of £900,000. Your estate pays tax at 40% on the value of your net assets in excess of the IHT allowance, ie 40% x (£900,000 – £325,000) = £230,000. However, if your spouse left all his/her estate to you, you would be able to use his/her unused IHT allowance on your own death. So on your death, up to £700,000 of your estate would not be taxed, (being your IHT allowance of £325,000 plus your partner’s IHT allowance of up to £325,000).
Whilst this is a relatively new rule, it can be applied retrospectively so that if your partner didn’t take up all his/her allowance at the date of his/her death, you are eligible to use any that’s unused on your death.
- f) The IHT tax rate is reduced to 36% if you leave at least 10% of your estate to a charity.
- g) IHT can be minimised with careful planning and with the ability and the mind to give away assets during your lifetime, by making gifts. The gift must be unconditional, without reservation and without you receiving any gain yourself. However if you were to die within 7 years of making a gift, the value of the gift comes back into your estate and it may be appropriate to take out life insurance against the potential IHT.
- h) But there are certain gifts that escape the 7 year claw-back, as follows:
- The annual IHT gift exemption allows you to give away £3,000 each year
- Gifts to charities and political parties are IHT free
- Gifts of £250pa to everyone you know are IHT free
- Gifts out of income, not “capital”, are IHT free
Gifts on consideration of marriage are IHT free, but are limited: £5,000 from a parent, £2,500 from a grand-parent and £1,000 from anyone else.
See, not simple is it? So take professional advice – contact Pratima (firstname.lastname@example.org) – and do things properly!