Inheritance tax: how to optimise your equity & assets
The words of Benjamin Franklin, ‘In this world nothing is certain but death and taxes’ are frequently quoted, but nowhere are they more appropriate than in the area of Inheritance Tax.
The good news is that not everybody has to pay Inheritance Tax when they die; the tax is only chargeable when the value of your estate is higher than the Inheritance Tax threshold, which currently stands at £325,000. Above this sum, known as the ‘nil rate band’, tax is charged at 40% and is usually paid out of the deceased's estate by the executor/s of the will.
The bad news is that an increasing number of British citizens are finding that their estates are being caught in this tax net when they die, largely as a result of house prices having risen considerably during the last thirty years.
A voluntary tax?
Some tax advisers describe Inheritance Tax as a ‘voluntary tax’, but how can collecting 40 percent of the value of an estate above the tax threshold be considered voluntary? The answer lies in a series of possible exemptions that are available - under particular circumstances.
Advice on how to optimise your equity & assets
Married Couples and Civil Partnerships Bequests:
If you bequeath your estate to your spouse of civil partner, there is no Inheritance Tax liability, even if the value of the estate is higher than the tax threshold, so long as the spouse of civil partner is a permanent British resident.
Increasing the Threshold:
Since 2007, it has been possible to transfer any unused inheritance tax threshold from a partner or spouse’s estate when they die, simply by incorporating their tax-free allowance, effectively doubling the potential tax threshold of the surviving partner. HM Revenue & Customs (HMRC www.hmrc.gov.uk) needs to be informed by the executors, if they wish to transfer what is known as the ‘nil rate band' from one partner to another.
Potentially Exempt Transfers:
If gifts with a total value of more than £3,000 per year are given, they are included in the value of an estate for a period of seven years. After that period of time they cease to be liable for Inheritance Tax. However, any number of gifts can be made to different individuals, without any tax liability, so long as the value of each gift does not exceed £250. Higher value wedding and civil partnership presents (up to £5,000 from parents, £2,500 from grandparents and great-grandparents and £1,000 from others) also avoid tax liability.
Any donations that you make to registered UK charities, either during your lifetime or as a bequest from your will, are exempt from Inheritance Tax.
A number of other possible tax exemptions are available for owners of businesses, farms, woodland or National Heritage property. Professional advice is always recommended if you find yourself having to deal with these types of assets.