Advice on Inheritance Tax

When you die, your executors may have to pay Inheritance Tax (often abbreviated to “IHT” — the ”H” is so it doesn’t get confused with Income Tax) on your estate.

This gives a simplified online Inheritance Tax guide and summary of how Inheritance Tax works and will help with your Inheritance Tax planning. In fact, it can be a lot more complicated than this suggests and you may need to take professional advice on specific details.

The way the tax is worked out is basically as follows:

1. Add up the value of all your assets at the date of your death. In addition you need to add in the gifts you made within the last 7 years up the date of your death (except gifts to exempt beneficiaries).
2. From that you can deduct any legacies you are leaving to exempt beneficiaries. See below what that means.
3. Deduct from this total a figure called the “nil-rate band”.
4. Tax is charged at 40% on the excess.

Exempt beneficiaries

The “exempt beneficiaries” are an important first step in avoiding Inheritance Tax. You don’t have to include gifts, either when you were alive or in your Will, if they are to any of the following:

- charities (but they have to be UK registered charities)
- UK political parties
- your spouse or your civil partner — except that if your spouse or civil partner is foreign it may not be that simple.

Nil rate band

Currently the “nil-rate band”, the threshold for Inheritance Tax, is £325,000. In other words, if your estate plus the gifts in the last seven years add up to less than £325,000, you have no tax to pay on your estate when you die. If it is worth more than £325,000, you may have to pay tax on the excess.

If your spouse (or civil partner) died before you do, however, and if they didn’t use up their nil-rate band on their death (maybe their assets weren’t above the limit, or maybe they left everything to you) then some or all of their nil-rate band may be available to use in your estate.

Gifts that don’t have to be counted

Although I said above to add up gifts made in the last seven years, there are certain gifts that can be ignored:

• In each tax year, the first £3,000 of gifts are ignored, regardless of anything else. If you don’t use your £3,000 in one year, it can be carried over to the next year (but not beyond the next year).
• There are special allowances for large wedding presents — up to £5,000. Seek advice on how they work.
• If you have got into a regular pattern of giving away spare income, those gifts may not need to be included. However, this is not always straightforward and again you or your executors may need to get guidance.
• Gifts of up to £250 in a tax year to as many people as you like don’t have to be counted. But if an individual gets over £250 in a year, then all the gifts to him or her have to be counted.

Special rules for businesses

If you own a business or part of a business — and investments like property don’t usually count as a business for this purpose — then in certain circumstances your share of the business can be valued at zero for Inheritance Tax purposes, regardless of what it is really worth. (The idea is that they don’t want businesses to have to be closed down and sold to pay Inheritance Tax on them when the business owner dies, and so businesses can often be passed on tax-free.)

Gerry Jackson