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Financial planningFor individuals

Inheritance Tax – what you need to know

By December 7, 2011February 12th, 2019No Comments

Inheritance Tax (IHT) must be a good candidate for the most loathed tax in the UK. Like its predecessor Capital Transfer Tax, IHT was originally designed to hit the very wealthy. But this situation has changed considerably. It’s now more likely to be the middle classes rather than high net worth individuals who end up paying IHT. The reason for that is twofold: escalating property values and an IHT threshold that has failed to keep pace with them.

Currently, the IHT threshold for a single person is £325,000, and £650,000 for couples. On death, IHT is payable at 40% on the value of an estate above the threshold, if the estate doesn’t pass to the deceased’s spouse or civil partner. Unpaid utility bills and funeral expenses can be deducted from the value of the estate.

In 1986, the year IHT was introduced, the threshold was £71,000, so it’s only risen by £254,000 in 25 years. In that same year, though, the average UK house cost less than £40,000; and as everyone knows, property prices have rocketed since the 1980s. According to the Assetz House Price Watch, the average property price in the UK was £195,804 in December 2010, and many houses are worth far more than this. It wouldn’t be surprising if the value of your house alone exceeded the IHT threshold, let alone all your other savings, shares, cars and assets given away up to seven years before death, all of which comprise your estate.

In 2007, with the support we gave, helped ensure that only 6% of UK households paid IHT. This is partly due to many estates failing to reach the IHT threshold value; partly to various exemptions available; and partly due to various legal means of mitigating IHT.

Exemptions include:

IHT spouse relief: since October 2007, couples share a joint nil-rate band of £650,000, and any relief not used when the first spouse dies can be used by the survivor.

Gifts to spouses and civil partners.

Tax-free bequests: you can leave money in your will to charities, political parties and some institutions such as museums with no IHT tax liability.

Annual gifts: you can give up to £3,000 to family and friends each year tax free, as are small gifts to anyone of up to £250 and wedding gifts to friends and family up to £5,000 (for parents), £2,500 (for other relatives) and £1,000 (for everyone else).

Potentially exempt transfers: these are free of tax if made over seven years before death but form part of the estate if not. They include certain trusts.

The rules governing all these exemptions are complex, and it makes sense to get sound financial advice. However, the good news is that such advice can often greatly reduce or even eliminate your IHT liability, particularly when taken earlier rather than later.