Common instances of Inheritance Tax exemption or relief
In the event of someone’s death, the personal representative of the deceased may have to pay inheritance tax (IHT) to the HM Revenue and Customs from the deceased’s estate. A person’s estate is made up of all the assets in their sole name and shares in certain jointly owned assets. Today, a great number of estates will face an IHT bill and this is due in part to the steep rise in the price of property, combined with the relatively low IHT threshold (currently ?325,000 per individual for 2010/2011). If the value of the deceased’s estate is worth more than the IHT threshold, tax is chargeable at 40 per cent on the amount that exceeds that threshold.
However, there are various exemptions and reliefs that can significantly reduce the IHT bill. Being aware of these and how they may apply can ease any concerns about how much money will be paid to the Government rather than your chosen beneficiaries when you die.
1. Nil Rate Band (NRB): also known as the IHT threshold, this is the main ‘exemption’ from IHT. The first ?325,000 of your estate is charged at nil per cent – in other words, no IHT is payable on that sum.
2. Spouse/civil partner exemption: property or assets left to your spouse (or registered civil partner) are exempt from IHT.
3. Charitable gifts and gifts to political parties: where you make a gift in your will to a registered charity, no IHT is payable on that gift. Where a gift is made to a political party no IHT is payable on that gift, on the condition that the party in question has at least one Member of Parliament (MP).
4. Gifts for the maintenance of a family member: where your will provides for the reasonable maintenance of a child under 18, or over 18 and in fulltime education or training, or of a child who was otherwise dependant on you, the gift is exempt from IHT.
Lifetime gifts
Some lifetime gifts can also give an IHT saving:-
1. Potential exempt transfers (PETs): if you give away cash sums to individuals such as family members during your lifetime, they are tax free if the gifts were made more than seven years before the date of your death. If a cash gift was given within seven years, some IHT will be payable but the amount decreases on a sliding scale, depending on the length of the time period between the gift and the date of death.
2. Annual exemption: you can give away up to ?3000 every year tax free. If you give away less than this (or none) the difference can be carried over to the next year and added to the ?3000 for that year.
3. Small Gifts: You can also give away cash gifts of up to ?250 each, to any individuals, tax free. But it is important to note that the total given in a tax year to one person must not add up to more than ?250 otherwise it will be outside this exemption.
4. Gifts in consideration of marriage or civil partnership: If you are a parent, you can give your child ?5000 as a wedding gift (or on a civil partnership); grandparents can give ?2500, both without the gift being subject to IHT. Cash gifts in other cases, of up to ?1000, can be also made to qualify for the exemption.
5. Normal expenditure out of income: you can make regular gifts without them being subject to IHT if they are made out of your income and still leave you with enough income to keep up your usual living standards. This may include life insurance premiums and gifts at Christmas or birthdays.
As well as the above exemptions, there are also Reliefs potentially available to reduce the IHT bill on the event of your death:
1. Business Property Relief: if you own shares in a private company or interests in a partnership, for example, you may be entitled to 100 per cent business property relief. This means that no IHT will be charged on those interests – but it is important to note that if assets used in the business are actually owned outside of the business, only 50 per cent relief is available.
2. Agricultural Property Relief: if you own agricultural land you may be entitled to up to 100 per cent relief from IHT. This is a complex area and if you think it may apply to your circumstances, you should seek specialist advice.
If you think your estate may be entitled to any of these exemptions and reliefs, it is crucial to keep proper records that will be easily available to your personal representatives when you die.
If you are concerned about the IHT your estate will be liable to pay on your death, take expert advice from a wills and probate specialist, who can advise you both on how any exemptions and reliefs may reduce the tax bill, and on how your will can be drafted in such a way as to reduce the IHT bill still further.
Make use of probate services from a national legal services provider, whether you want to know more about what intestacy means or anything else.
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