Inheritance tax is a tax on chargeable transfers, both gifts during lifetime and also bequests on death. It is the tax on estates that, colloquially, people refer to as “death duty”.
The core feature of the regime is that chargeable transfers exceeding a total of £325,000 are taxable at 20 per cent in lifetime and 40 per cent on transfers on death. The ownership of a fairly modest house therefore can result in a person’s estate exceeding £325,000 and a possible tax liability on death, so it is not only the very wealthy who are affected.
After seven years, outright lifetime gifts (known as potentially-exempt transfers) cease to be brought into the calculation of the cumulative total of gifts. Gifts made within seven years of death are added to the deceased’s estate to calculate to the value of the estate.
The key exemptions are:
z Gifts between spouses or civil partners
z Lifetime gifts not exceeding £3,000 in any year
z Wedding or civil partnership gifts within certain limits
z Gifts to charities
Two very significant reliefs are agricultural property relief and business property relief, and in certain circumstances relief is granted on the whole agricultural value, or business property value.
Some tax planning considerations:
z Estate planning for married couples and civil partnerships was simplified following changes in the Finance Act 2008. The changes allowed the surviving spouse to “inherit” the £325,000 Nil Band of the predeceasing spouse. This can lead to a Nil Band being increased to £650,000 (2 x £325,000) on the second death. The vast majority of couples have estates of less than £650,000. It may be worth reviewing your will if it was made before the change in the law, because advice given then may no longer be applicable. In particular, the advice may have been to bequeath estate to children on the first death, but the transferable Nil Band may now allow estate to be bequeathed to the surviving spouse with no tax disadvantage.
z There is an exemption for regular gifts made out of income that would otherwise have been retained unspent. Oddly therefore, those on larger incomes may be treated most generously. It is helpful to such a claim to put paperwork in place as evidence of the intention to continue making regular gifts.
z If you make a gift, but reserve a benefit, you will be treated as continuing to own the asset for tax purposes. This trap is commonly encountered with gifts of houses by parents to children, where the parent continues to occupy the property. This can result in a capital gains tax liability as well as an IHT liability.
z Agricultural relief is only granted on the agricultural value of land and buildings, and the value for agricultural use may be a fraction of the market value. Landowners should consider whether they might need to secure business property relief.
z Not all trading activity is eligible for business property relief – care must be taken to consider what activities on a farm or an estate can be eligible to business property relief. Business property relief may be lost if the emphasis is on investment activity. Following important recent case law on business property relief, it might be wise to take advice to review how the relief applies to your business.
If you would like to discuss any of the issues raised in this article, please contact Paul Roper on 01835 862391 or email firstname.lastname@example.org