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Beginners’ Guides
Beginners’ guide to Inheritance Tax Planning
What is Inheritance tax?
Inheritance tax, or IHT as it is commonly known, is payable on everything you have of value when you die, including:
- Your home
- Jewellery
- Savings and investments
- Works of art
- Cars
- Any other properties or land – even if they are overseas.
It’s usually payable on death. But there are certain circumstances, if you put assets into certain types of trusts, for example, when IHT becomes payable earlier.
- When you die your assets become known as your estate. Any part of your estate that is left to your spouse or civil partner will be exempt from IHT. The exception is if your spouse or civil partner is domiciled outside the UK. Then the maximum you can give them before IHT may need to be paid is £55,000. Unmarried partners, no matter how long-standing, have no automatic rights under the IHT rules.
- Where your estate is left to someone other than a spouse or civil partner (i.e. to a non-exempt beneficiary), IHT will be payable on the amount so left as exceeds the nil rate threshold. The current threshold is £325,000. The threshold usually rises each year but has been frozen at £325,000 for tax years up to and including 2014/15.
- Every individual is entitled to a Nil Rate Band (that is, every individual is entitled to leave an amount of their estate up to the value of the nil rate threshold to a non-exempt beneficiary without incurring IHT). If you are a widow or widower and your deceased spouse did not use the whole of his or her Nil Rate Band, the Nil Rate Band applicable at your death can be increased by the percentage of nil rate band unused on the death of your deceased spouse, provided your executors make the necessary elections within 2 years of your death.
- To calculate the total amount of IHT payable on your death, gifts made during your lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made within seven years of death plus the value of the element of your estate left to non-exempt beneficiaries exceeds the nil rate threshold, IHT is payable at 40% on the amount exceeding the threshold. In some circumstances, IHT can also become payable on the lifetime gifts themselves - although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of IHT payable.
- Your executors or legal personal representatives typically have six months from the end of the month of death to pay any IHT due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares, where the IHT can be paid in instalments. Then your beneficiaries have up to 10 years to pay the tax owing, plus interest. At the time of writing interest is charged at 3% on instalments or late payments. If you pay by instalments you must pay a tenth of the amount of tax owed each year for 10 years
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