Wills For All

Inheritance Tax (IHT) is the current name for the charge made by HMRC (Capital Taxes Office) when assets or money are gifted either during lifetime (at a rate of 20%) or on death (at a rate of 40%). At various times in the past it has been called Legacy Duty, Estate Duty or Capital Transfer Tax.

All gifts of money or assets are classified as one of the following:-

• Exempt - not liable to charge as a current exemption applies (see separate list of exemptions and reliefs).
• Potentially Exempt - not covered by a current exemption but will become exempt after 7 years of the gift being made. If the donor dies within 7 years of the gift it becomes chargeable but may qualify for taper relief reducing the tax payable by 80% in year 7, 60% in year 6, 40% in year 5 and 20% in year 4. If death occurs within 3 years of the gift there is no taper relief available.
• Chargeable - these are all gifts which are not exempt and includes failed potentially exempt gifts (where the donor dies within 7 years of the gift). The most common example of a chargeable situation is, of course, when a person dies - the rate of tax applying is 40% (the Death Rate). However there are other occasions which are treated as chargeable - principally gifts of money or assets to a trust during lifetime (inter vivos) when the tax rate is 20% (the Lifetime Rate). Certain trusts will also be liable to a periodic charge every 10 years and when assets or money are distributed to beneficiaries but the calculations are complex.

The potential IHT liability on chargeable events can be reduced by certain exemptions and reliefs (see separate list) and tax will only be payable if a balance remains after deducting these. The liability on certain assets may be paid in instalments if required.

Exempt Gifts & Reliefs

• Small gift exemption - where the total sum given to a person in any tax year does not exceed £250 (e.g. gifts of £200 each in a tax year to 20 different persons - total £4,000 - would be exempt).
• Annual allowance - every donor has an allowance of £3,000 to set against any gifts which are not exempt in any tax year and if this allowance has not been used at all in the previous tax year it can be added to the current year but cannot be carried forward beyond that. Accordingly a £6,000 annual allowance is only available if the allowance was not used in the previous tax year.
• Marriage allowance - where gifts are made on marriage a one-off exemption is available of £5,000 if the donor is a parent of one of the parties, £2,500 if a grandparent or £1,000 if not a parent or grandparent. The gift cannot be made after the marriage.
• Gifts from income - one of the lesser used allowances because the test is whether the Capital Taxes Office are satisfied that gifts were made regularly (rather than a one-off) out of income instead of capital and did not affect the usual standard of living of the donor. It would normally be the responsibility of the Executors to provide the relevant information to HMRC in order to obtain the exemption. Regular premiums under a life policy could be covered by this.
• Nil Rate Band allowance - this rises every year and in recent times has been announced in advance. Every individual is entitled to this. For the tax year 2008/2009 it is £312,000 rising to £325,000 for 2009/2010 and £350,000 for 2010/2011. Tax is charged at 0% on this sum - hence Nil Rate.
• Spouse exemption - all assets or money passing to a legally married spouse or registered civil partner is totally exempt from tax regardless of the amount. However if the spouse surviving is not domiciled in the UK the exemption is limited to £55,000 only.
• Charity exemption - all assets or money passing to a UK registered charity (or political party) is totally exempt.
• Agricultural Property & Business Property Relief - provided certain conditions are met either a 50% or 100% relief is available on these assets but specialist advice is required. Many AIM quoted investments qualify for this but care must be taken as special rules apply.

Inheritance Tax Planning

With careful planning it is possible to reduce a potential IHT liability or to eliminate it completely. Prior to 9 October 2007 it was necessary for married couples and registered civil partners to structure their Wills so that both Nil Rate Band Allowances would be used rather than for one allowance to be wasted in situations where the entire estate passed absolutely from one spouse to the other.

However this is now not the case and on the death of the surviving spouse on or after 9 October 2007 where the Nil Rate Band Allowance was not fully utilised on the death of the first spouse then an additional allowance can be claimed up to a maximum of another Nil Rate Band Allowance. For example if a husband had died in 2001 leaving everything to his wife who died in March 2008 then 2 allowances of £300,000 could be claimed making a total of £600,000. The additional allowance is not given automatically but needs to be claimed by the Executors/Administrators of the second spouse to die by completing the appropriate form and providing certain documentation. It is therefore sensible for the required information to be collated at the time of the death of the first spouse to ensure this is available when the time comes to claim the additional allowance (or part thereof).

There are also many occasions (not just for IHT planning) where trusts may be suitable for inclusion in a Will but advice is needed from specialists in this area because of the complexities relating to trusts and how they are taxed. Wills for All Ltd has experienced, professionally qualified practitioners who can give advice on this subject. We also have close connections with Independent Financial Advisers (IFAs) principally with Allfield Financial Group www.allfieldfinancial.com

For further information on IHT please go to www.hmrc.gov.uk/inheritancetax