A UK Tax Primer (101) – Inheritance Tax; Stuff you should know
It has been said that the only things that are certain in life are birth, death and taxes. Inheritance Tax brings death and taxes together, as your assets on death are recorded, assessed and taxed according to the rules at the time. For most people in the population, Inheritance Tax, (IHT), is ‘voluntary’ as a bit of planning before death should ensure that no tax is payable.
The first element to know is the Nil Rate Band, for 2014/15 and 2015/16, this is £325,000, if your estate is worth less than this then no tax will be payable. If you are in a couple, married or a civil partnership, you can assume a joint Nil Rate Band of £650,000, as assets passed between spouses are exempt and will only be taxed on the second death. Recent budget speeches suggest that this will be increased, to jointly £1Million, but only in respect of the principal private residence, (the home you jointly own and live in), by April 2016. The detail has not been released yet, so nothing can be assumed.
On death, some assets pass to someone else by “survivorship”; this is usually assets held in joint names, like houses, joint bank accounts and investment bonds. These will be available to the survivor without Probate and are usually outside the scope of Inheritance Tax.
Tax planning for IHT is a bit like “pass the parcel”; if you do not hold the asset when you die, then it is not taxed as part of your estate. If your estate is in excess of the Nil Rate Band, you need to use up the asset, give it away or provide for the tax before you die.
Using it up is easy to understand; spending your money while you are alive leaves nothing for the taxman, but this is not without pitfalls; not least in timing, to prevent running out of money while still alive.
Giving it away has its own hazards. On death, your executor has to account for all gifts, outside of the allowances, for the last 7 years, so planned gifting involves up to £325,000 every seven years to avoid paying any tax. The small allowances can be complex, but allow for further giving each year, (https://www.gov.uk/inheritance-tax/gifts).
Providing for the tax involves setting aside enough cash or an insurance policy to pay the tax due on death. As the executor will need to pay the tax before the estate can be distributed, not planning this can get both complex and expensive for the estate.
As a general rule, the State does really well from most people’s reluctance to plan sensibly for their own demise. Roy Jenkins in 1986 said about IHT, “it is, broadly speaking; a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. Not much has changed!
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If you know you need formal advice, have a look at http://bankfield.net/personal/tax-planning/inheritance-tax/, or ask around for a recommendation, it might even be me.