Inheritance Tax paid to HMRC in the first 4 months of this year was 1.9 billion

Photo Credit: Terrah Holly

Inheritance tax (IHT) as it is understood  today was introduced in 1796 as a levy on the wealthy, but rising property prices and tax thresholds that have not kept pace with inflation mean that the number of estates that fall into the IHT net is ever growing.

A series of exemptions have been introduced to allow families to give away more of their assets tax-free, but the system has so many intricacies that it is causing a great deal of confusion.

The nil-rate band and property allowance

Any inheritance left to a spouse or civil partner is usually tax-free. The amount each person can leave to other heirs tax-free, called the nil-rate band (NRB), has been frozen at £325,000 since 2009. Tax is normally paid at 40 per cent above this threshold. A person who dies and does not use all of their nil-rate band can pass the remainder to their spouse, who will have a larger allowance of assets that they can pass on to heirs. If it had risen with inflation the nil-rate band would now be £414,000.

Those whose estates are worth more than the nil-rate band may be able to use an additional inheritance tax threshold known as the “residential nil-rate band”, which allows an extra £125,000 per person if you are passing on a property that is your main residence to a direct descendant (child or grandchild and their partners). This figure is due to rise to £175,000 over the coming years.

The “residence nil rate band” RNRB , is reduced if your total Estate is valued at greater than £2M, calculating the RNRB is complicated and maximising its effectiveness may require careful planning.

Gifting

You can give away as much money as you like tax-free as long as you live for seven years after making the gift. If you die before then, the recipients could face demands for IHT, depending on the size of your Estate. You are, however, allowed to give away up to £3,000 a year without incurring IHT and you can carry the allowance over for a year. The £3,000 amount has remained unchanged since 1981, if it had risen with inflation it would be about £10,932 today.

There is also a small gifts rule, which allows you to give as many gifts of up to £250 to as many people as you want each tax year.

It is also possible to make regular gifts from income, as long as it does not affect you standard of living.

Pension rules

A quirk in the rules means that if someone transfers their final-salary pension (which you cannot pass on save for a spousal or dependant’s pension) into a money purchase scheme (which you can ordinarily leave in your estate) and dies within two years, the pension pot could be liable to inheritance tax. If the person knew they were in ill health at the time of the transfer, HMRC designates it a ‘chargeable lifetime transfer’ and inheritance tax may apply.

Insurance

Many people buy critical illness and life protection together, and often they are placed into a trust. If not placed in Trust any proceeds are likely to increase the Inheritance Tax burden on your Estate.

Summary

At Ward Williams Financial Services Ltd we believe that too much Inheritance tax is paid, and that with professional advice the burden of Inheritance Tax on your Estate can be reduced.

For more information please do not hesitate to contact the team at Ward Williams Financial Services Ltd on 01932 830664 or by email on wwfs@wardwilliams.co.uk.

IHT, Tax

About the author

Cliff, Director of Ward Williams Financial Services Ltd, has nearly 30 years experience in the Financial Services Industry with a variety of institutions including a major Private bank. He established WWFS in 2003 and is qualified to Diploma level. Cliff has advised numerous clients on all aspects of Financial Planning including Wills and Estate Planning.  He has a deep understanding of the need to plan wisely in this ever-changing world. His interest and enjoyment, however, still comes from meeting with clients and helping them put the financial side of their lives in better order. Cliff has lived in the Weybridge area for over 25 years and is married with two grown-up children. A keen sportsman, he loves playing cricket, hockey and golf – but these days probably spends more time spectating!