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Inheritance Tax

The regulations applying to UK Inheritance Tax (some refer to this tax as death duties) can be somewhat complex and whilst the information following is given as a general guide, we strongly recommend that further advice should be obtained from a professional advisor before you make any plans and to ensure you are fully aware of your options relating to your particular circumstances.

Inheritance Tax is a tax applied by the UK Government on probated estates (in simple terms the assets of a deceased person) valued in excess of £325,000. The current tax for 2009/10 is 40% of the amount of an estate over £325,000 and the Chancellor announced in 2009 in his pre-budget report that this threshold of £325,000 would not be increased in 2010/11. The Government considers increasing this threshold for inflation annually but over recent years the threshold has not kept pace with inflation. The 40% tax band has remained constant for a number of years. The value of any property or land owned is included in an estate and bear in mind that property values can increase or decrease, possibly dramatically, over time. Many people may well be property rich but asset poor. There are however a number of steps you can take to minimise or avoid paying such tax.

It has been estimated that in 2008/09, the Government received over £2.2 billion pounds in Inheritance Tax payments that could have been avoided by better planning.

This tax is not payable on the value of an estate left to a spouse (legally married partner) or to a legal Civil Partner, or to the value of any bequest to a UK registered charity (registered with the UK Charity Commission) The tax is payable in respect of cohabitating couples. The Government also allows married couples and civil partners to transfer any unused inheritance tax allowance to each other. This means for example that if a husband dies first, he can leave all his assets to his wife, and transfer his £325,000 Inheritance Tax Allowance to her. Thus, no Inheritance Tax would be paid by the husband on his estate and when his wife dies, Inheritance Tax would not be paid on the first £650,000 of her estate.

In respect of minimising any payment of Inheritance Tax (IT) it is essential that the person makes a valid UK Will, if not already done, to ensure your assets go to whom you want. This will also ensure your estate does not pay any IT that could be avoided..People should also ensure that any life insurance policies they have are written into trust, as this means payouts are automatically free from IT. Check if any pension payouts would be due on death and added to a deceased estate as this could increase the estates valuation and may require consideration. People should also make full use of their annual tax free allowances. Individual Savings Accounts (ISA’s) allow up to £3,600 (£5,100 from April 2010) in Cash to be invested annually where the interest earned is free of tax. Equally, a Stocks and Shares ISA allows up to £7,200 (£10,200 from April 2010) to be invested with all interest free of tax. ISA’s are also not required to be stated on tax returns.

You are able to give £3,000 to one person per year and £250.00 to as many people as you like, without the money being liable for IT. You can also give £5,000 to your children when they get married. People can make larger Gifts as long as they live for seven years after the gift was made, a pro-rata tax being applied retrospectively for each of the seven year the donor did not live.

Certain assets left in Trust may be excluded from IT but the primary disadvantage of a Trust (and there are several types of trust) is that the donor gives up all control and ownership of the asset value put in trust.

One of the issues that can arise with this iniquitous tax is that it is levied on all assets including property, not just fluid assets such as cash. This can have enormous consequences. Take a simple example. A single man with £50,000 in savings in cash was left a house and contents by his parents valued on the man’s death at £500,000. The IT levied on his estate of £550,000 would be £90,000 (40% of £225,000 – the balance of his estate over the threshold of £325,000). In order to obtain probate he would have to pay that £90,000, but as he has only £50,000 in savings or ready cash, he would have to raise the balance required of £40,000, possibly by having to sell the house.

If you have created a General or Lasting Power of Attorney, your Attorney(s) cannot normally make or amend any valid Will you have previously made when mentally aware.

Again, owing to the potential significance of this tax, and to take into account individual circumstances, it is highly preferable that you have made, and reviewed, you Will and if you may be effected by this tax, that you take appropriate professional advice, for example from a registered Independent Financial Advisor, (IFA) a Bank or your Solicitor. You are welcome to refer any initial enquiries to RACDV.

Further Reading

See Information Sheet 22c - Inheritance Tax