When is Inheritance Tax payable?
What is Inheritance Tax?
Inheritance Tax is a tax which is payable by the estate of a person when they die if their estate is above the Inheritance Tax threshold. Inheritance Tax is also payable sometimes on gifts or trusts made in the seven years before a person’s death. For the tax year 2010-11 the rate of Inheritance Tax payable is 40%.
What is the threshold for Inheritance Tax?
The threshold for Inheritance Tax changes from time to time. For the tax year 2010-11 it is £325,000.
My estate is likely to exceed the threshold. Does that mean that Inheritance Tax will be payable?
Sometimes Inheritance Tax is not payable even where an estate exceeds the threshold. This is because there are certain exemptions and reliefs available. The most common of these are as follows:
Spouse or civil partner exemption
Normally Inheritance Tax is not payable where a spouse or civil partner inherits an estate, provided that they have a permanent home in the UK.
Charity exemption
Normally gifts made to charities are exempt from Inheritance Tax. For the exemption to apply the charity must be a “qualifying charity” (a body of persons or trust established in the UK for charitable purposes only).
Gifts to other institutions
Some gifts made to institutions such as museums, universities and the National Trust are exempt from Inheritance Tax.
Gifts made to political parties
Gifts made to a UK political party that has at least two members elected to the House of Commons or that has one elected member but the party received at least 150,000 votes are exempt from Inheritance Tax.
Gifts made more than seven years before your death
If you make a gift to someone more than seven years before your death, the gift is normally exempt from Inheritance Tax. For the exemption to apply you have to give the asset away in its entirety – you cannot keep an interest in it. For example, if you give away your house but continue to live in it rent free Inheritance Tax will be payable.
Gifts made less than seven years before your death
If you make a gift or several gifts up to a certain amount known as an “annual exemption”, such gifts are exempt from Inheritance Tax. You can also use any unused allowance from the previous year. For the tax year 2010-11 the annual exemption is £3,000.
Any “small gifts” made are tax-free. For the tax year 2010-11 a small gift is a gift up to £250. If you give a larger gift you cannot claim an exemption for the first £250 of the gift.
You can make a tax-free gift to someone who is getting married or registering a civil partnership up to a certain amount. For the tax year 2010-11 parents can each give cash or gifts worth £5,000, grandparents and great grandparents can each give cash or gifts worth £2,500 and anyone else can give cash or gifts worth £1,000. For such a gift to be tax-free it must be given or there must be a promise to give it on or shortly before the date of the wedding or civil partnership ceremony. The exemption won’t apply if the ceremony doesn’t go ahead or if the gift is made after the ceremony without having been promised before.
Generally you can make regular gifts or payments that are part of your normal expenditure out of your after-tax income tax-free. Examples of such gifts and payments include regular payments to someone, regular Christmas gifts and maintenance payments.
The annual exemption is in addition to the other exemptions available for gifts.
If you die between three and seven years after making a gift and the gift is not of a type which is exempt from Inheritance Tax the amount of Inheritance Tax payable is reduced on a sliding scale (this is called “taper relief”).
Business, Woodland, Heritage and Farm Relief
If you own a business, farm, woodland, or National Heritage property, some relief from Inheritance Tax is likely to be available upon your death.
Ways to minimise Inheritance Tax?
Increase the threshold
Married couples and registered civil partners have been able, since October 2007, to effectively increase the threshold when the second partner dies. This is done by the executors or personal representatives transferring the unused Inheritance Tax threshold of the first spouse or civil partner to the other spouse or civil partner when they die. For the tax year 2010-11 this can increase the threshold to as much as £650,000.
Make a will
By making a will you may have the opportunity to take advantage of some of the exemptions and reliefs available. As a consequence it may be possible to avoid your estate having to pay Inheritance Tax all together or to minimise the amount of Inheritance Tax payable.