Inheritance Taxation UK & Inheritance taxation planning by Lovewell Blake, East Anglia, UK

Inheritance taxation - more facts

Scope of inheritance tax
Inheritance tax is chargeable on a person’s estate when they die and on certain gifts made during an individual’s lifetime.

Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and the result can be a substantial tax saving.

The rate of tax on death is 40% and on lifetime chargeable transfers is 20%. The first £255,000 is not chargeable.

Inheritance tax on lifetime gifts
There are three types of lifetime transfers

• A transfer to a company or a discretionary trust is immediately chargeable.

• Exempt gifts for example to a charity, which are ignored both when they are made and also on the subsequent death of the donor.

• Any other transfers will be potentially exempt transfers (PETs) and inheritance tax is due only if the donor dies within seven years.

Inheritance tax on death

On death inheritance tax is charged on the value of the estate which includes any interests in trust property where the deceased had a right to income from, or use of, the property.

Furthermore

• Potentially exempt transfers made within seven years become chargeable.

• There may be an additional liability because of chargeable transfers made within the previous seven years.

Planning
Use of potentially exempt transfers

Wherever possible gifts should be made as potentially exempt transfers rather than as chargeable transfers. This is because a gift will be exempt from IHT if the donor survives for seven years.

Nil rate band and seven year cumulation

Chargeable transfers covered by the nil rate band can be made without incurring any IHT liability. Once seven years have elapsed a gift is no longer taken into account in determining IHT on subsequent transfers. Therefore every seven years a full nil rate band will be available to pass assets out of the estate.

Annual exemption

£3,000 per annum may be given by an individual without an inheritance tax charge. An unused annual exemption may be carried forward to the next year.

Gifts between husband and wife

Gifts between husband and wife who are UK domiciled are exempt. Husband and wife should transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and potentially exempt transfers.

Small gifts

Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift.

Normal expenditure out of income

Gifts which are made out of income which are regular and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption.

Family maintenance

A gift for family maintenance does not give rise to an inheritance tax charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative.

Wedding presents

Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors.

Gifts to charities

Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes.

Business property and agricultural property reliefs

When business or agricultural property is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief.

Use of trusts

Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate.

Life assurance

Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities.

A policy can also be arranged to cover inheritance tax due on death. It is particularly useful in providing funds to meet an inheritance tax liability where the assets are not easily realised, eg family company shares.

Wills

As the main inheritance tax liability is likely to arise on death, a sensible and up to date Will is important.

Please contact Chris Freemantle or Graham Sillett on 01603 663300 Or email
Chris on: cdf@lovewell-blake.co.uk or Gragham on: gms@lovewell-blake.co.uk

No action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this website can be accepted by Lovewell Blake.

Lovewell Blake is authorised and regulated by the Financial Services Authority.


	Inheritance taxation - more facts Scope of inheritance tax Inheritance tax is chargeable on a person’s estate when they die and on certain gifts made during an individual’s lifetime. Most gifts made more than seven years before death will escape tax. Therefore, if you plan in advance, gifts can be made tax-free and the result can be a substantial tax saving. The rate of tax on death is 40% and on lifetime chargeable transfers is 20%. The first £255,000 is not chargeable. Inheritance tax on lifetime gifts There are three types of lifetime transfers • A transfer to a company or a discretionary trust is immediately chargeable. • Exempt gifts for example to a charity, which are ignored both when they are made and also on the subsequent death of the donor. • Any other transfers will be potentially exempt transfers (PETs) and inheritance tax is due only if the donor dies within seven years. Inheritance tax on death On death inheritance tax is charged on the value of the estate which includes any interests in trust property where the deceased had a right to income from, or use of, the property. Furthermore • Potentially exempt transfers made within seven years become chargeable. • There may be an additional liability because of chargeable transfers made within the previous seven years. Planning Use of potentially exempt transfers Wherever possible gifts should be made as potentially exempt transfers rather than as chargeable transfers. This is because a gift will be exempt from IHT if the donor survives for seven years. Nil rate band and seven year cumulation Chargeable transfers covered by the nil rate band can be made without incurring any IHT liability. Once seven years have elapsed a gift is no longer taken into account in determining IHT on subsequent transfers. Therefore every seven years a full nil rate band will be available to pass assets out of the estate. Annual exemption £3,000 per annum may be given by an individual without an inheritance tax charge. An unused annual exemption may be carried forward to the next year. Gifts between husband and wife Gifts between husband and wife who are UK domiciled are exempt. Husband and wife should transfer assets to ensure that both spouses can make full use of lifetime exemptions, the nil rate band and potentially exempt transfers. Small gifts Gifts to individuals not exceeding £250 in total per tax year per recipient are exempt. The exemption cannot be used to cover part of a larger gift. Normal expenditure out of income Gifts which are made out of income which are regular and do not result in a fall in the standard of living of the donor are exempt. Payments under deed of covenant and the payment of annual premiums on life insurance policies would usually fall within this exemption. Family maintenance A gift for family maintenance does not give rise to an inheritance tax charge. This would include the transfer of property made on divorce under a court order, gifts for the education of children or maintenance of a dependent relative. Wedding presents Gifts in consideration of marriage are exempt up to £5,000 if made by a parent with lower limits for other donors. Gifts to charities Gifts to registered charities are exempt provided that the gift becomes the property of the charity or is held for charitable purposes. Business property and agricultural property reliefs When business or agricultural property is transferred there is a percentage reduction in the value of the transfer. Often this provides full relief. Use of trusts Trusts can provide an effective means of transferring assets out of an estate whilst still allowing flexibility in the ultimate destination and/or permitting the donor to retain some control over the assets. Provided that the donor does not obtain any benefit or enjoyment from the trust, the property is removed from the estate. Life assurance Life assurance arrangements can be used as a means of removing value from an estate and also as a method of funding IHT liabilities. A policy can also be arranged to cover inheritance tax due on death. It is particularly useful in providing funds to meet an inheritance tax liability where the assets are not easily realised, eg family company shares. Wills As the main inheritance tax liability is likely to arise on death, a sensible and up to date Will is important. Please contact Chris Freemantle or Graham Sillett on 01603 663300 Or email Chris on: cdf@lovewell-blake.co.uk or Gragham on: gms@lovewell-blake.co.uk No action should be taken without seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this website can be accepted by Lovewell Blake. Lovewell Blake is authorised and regulated by the Financial Services Authority.