Inheritance tax was introduced in 1986 and is also known as “death duty”. It is applied to transfers of wealth on, or shortly after death that exceeds a minimum threshold known as a nil rate band (£325,000 in the 2011/12 tax year). If a person dies and their total estate is above the nil rate band then Inheritance Tax becomes payable. On the amount exceeding the nil rate band the estate is charged at 40%. As you can see, inheritance tax is an important revenue for the government.
Many married couples consider their assets to be held jointly. There is no inheritance tax between husband and wife. Since October 2007 and subject to current legislation remaining, in the event of one spouse dying, an application can be made to utilise the deceased nil rate band that has not been used on second death. Therefore a married couple effectively between them have a nil rate band of £650,000. Effective Inheritance tax planning with a financial advisor before the first death occurs is the preferred option.
A persons estate includes the total of every asset owned solely, a share of what is jointly owned, gifts that have already been made within seven years of death and gifts where the person has retained an interest. Persons that are UK domiciled are chargeable to Inheritance Tax on all their worldwide assets.
There are ways of reducing the estate and ultimately Inheritance Tax such as: Utilising allowable exemptions e.g. gifts to registered charities, utilising exempt gifts allowances e.g. £3000 annual gifting allowance and utilising gifts out of usual expenditure to name a few. A financial advisor will be able to help inform you of your eligibility and allowable limits. There is also business and agricultural inheritance tax relief to take into consideration.
A financial advisor will then advise you on the most appropriate method of helping mitigate the bulk of your Inheritance Tax. There are many different methods of doing so such as utilising trust planning for capital investment. The type of trust which can be utilised for inheritance tax planning is dependent on the needs of the settlor (person gifting the funds into trust). There are different trusts for different needs such as growth, income, accessibility, the health of the settlor and what level of flexibility is required. Life Insurance policies are used for different planning needs within inheritance tax planning. There are also more specialist investment vehicles that give inheritance tax relief in certain circumstances which a financial advisor would pick up during the fact finding process. Effective inheritance tax planning ensures your estate is passed to whom you intended whilst ultimately, saving tax leaving more capital for your loved ones and not to the tax man.
HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen.