Most of us want to pass on as much of our estate to our children and grandchildren as we can, rather than have them end up paying 40 per cent inheritance tax.
But it is important to note that many people worry unnecessarily about inheritance tax.
Your beneficiaries will only be liable if your estate is worth more than £325,000, or £500,000 if there is a property being passed to direct descendants and the estate value is less than £2million.
Once these thresholds are passed, the 40 per cent inheritance tax rate is levied on any assets in the estate worth above and beyond those levels.
Inheritance tax of 40 per cent is typically levied on a deceased person’s assets worth over and above £325,000, which is called the nil rate band.
Many people are allowed to leave a further £175,000 worth of assets without them becoming liable for inheritance tax, if their home forms part of their estate and they leave it to direct descendants.
That means children, including adopted, step or fostered, and those children’s linear descendants.
This extra sum is what is called the residence nil rate band, and it is available to claim on deaths on or after 6 April 2017.
Both protected amounts or ‘bands’, adding up to £500,000 per person, can be transferred to a surviving spouse or civil partner if unused on the death of the first spouse.
What is a gift for inheritance tax purposes?
A gift can be:
– Money
– Property and land (unless it qualifies for agricultural property relief)
– Antiques and jewellery
– Shares that do not qualify for business relief
– Anything you sell to someone for less than market value; the difference between the market value and sale amount will count as a gift to that person if you die within seven years of the date of the gift, and then inheritance tax may be due on all or some of the gift you have made.
What gifts are inheritance tax NOT payable on?
– Gifts between spouses, providing they are married or in a civil partnership, as long as they live in the UK.
– Gifts to registered charities.
– Gifts to political parties, providing they have at least two sitting MPs or a certain number of votes.
– Gifts to heritage organisations, like the National Trust.
– Gifts worth less than an annual gift allowance of £3,000, which each person can give free of inheritance tax per tax year.
The £3,000 can be given to one person, or split between several persons. If you do not use the allowance, or full allowance for the previous tax year, then you can add that to the current tax year.
When do you pay inheritance tax on a gift?
Any gift not covered by the tax free rules above is subject to the seven-year rule.
If you live for seven years after the date of the gift, then inheritance tax is payable depending on the period of time that has elapsed from the date of the gift and your death.
The value of the gift is not reduced, merely the rate of tax that is applied to it.
Gifts between 0 and 3 years: 40 per cent
Gifts between 3 and 4 years: 32 per cent
Gifts between 4 and 5 years: 24 per cent
Gifts between 5 and 6 years: 16 per cent
Gifts between 6 and 7 years: 8 per cent
No inheritance tax is payable on gifts made seven years and over before your death.
If the gifts made within seven years of death add up to less than £325,000, then because gifts are calculated against the nil rate band first before any other assets, that means there will be no tax to pay on them.
Once you’ve given away more than £325,000 in the seven years before your death, anyone who gets a gift from you will have to pay inheritance tax personally on their gift at the tax rates above.
The latter can catch a lot of people out.
What about making gifts into trust?
Gifts made to trusts are subject to an immediate inheritance tax charge of 20 per cent where the value of the gift exceeds the available nil rate band of £325,000.
However, the nil rate band starts again every seven years, and this means that significant gifts can be made free from inheritance tax during an individual’s lifetime.
Beware though, because in some cases gifts into trusts create immediate inheritance tax bills, and if you have made a series of gifts over time, then gifts up to 14 years prior to your death may affect how much tax is payable on them.
For further information on tax and estate planning call Asset Harbour on 01276 986333
Original article from the Daily Mail