Inheritance Tax (IHT) affects many people in the United Kingdom and not just the super-rich. Even though there may now be a decline in the value of property in the UK over the last couple of decades property values have increased at a tremendous rate.
Many in work have gained financially from the boom in the economy and even those who have assets even slightly over the UK’s modest IHT threshold may find themselves liable to IHT. This is because the Inheritance Tax has not kept pace with the times and in particular has not been adjusted in line with the increase in house
So IHT planning needs to be meticulous so that the minimum tax is levied and paid upon a death. Inheritance tax is a form of death duty and requires sound planning to reduce the liability as much as possible. No one wants to leave their survivors with a large tax bill and a decreased amount of inheritance.
UK Inheritance Tax Factoid
- In the UK assets in excess of a modest £320,000 could be liable to IHT
- IHT is levied at 40%
- Disposing of assets before death is no guarantee of mitigating the tax owed
- IHT is payable on UK and overseas assets, like a house, property or funds in another country
- Making a gift of a house while still alive will not allow the avoidance of IHT by the survivors
Reduce the Inheritance Tax Liability
There are a number of methods to reduce the inheritance tax liability
- Money or other assets inherited from a spouse of civil partner
- Gifting to UK charities
- Gifts or gifts of cash given away seven years before death
- Make a will
- Use tax efficient investments
Inheritance Tax Rules
The rules around Inheritance Tax allows married couples or those with a registered civil partnership to inherit ‘unused’ tax allowances of their dead partner/spouse. But when the survivor of the partnership dies then allowances to their estate are doubled to £650,000.
However the executors of the estate must transfer the allowance to the surviving spouse or partner. Otherwise upon the death the executors will be required to pay the IHT within six months of the death month of the partner and in difficult financial times and markets, this could mean selling assets or borrowing to pay the tax.
For Inheritance Tax to be effective requires that a ‘happy family’ is in place, a family where the surviving partner, upon their death, will follow the wishes of the first to die. Otherwise the tax man will certainly come knocking on the door for 40% over the threshold.
Inheritance Tax is a maze of complex legislation that often bamboozles the inexperienced and those unfamiliar with finance and tax law. It is always best to get the advice of a tax lawyer, personal tax consultant or an accountant who has a thorough knowledge of the workings of IHT and one who will provide up to date information and advice.
The UK Inland Revenue has a good explanatory site which is essential reading.
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