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September 20th 2013 / BY: Wisteria

Inheritance Tax Basics

If you are considering gifting assets to relatives, it is important to understand the rules about inheritance tax (IHT) to ensure your position is optimised.

Broadly speaking, IHT is charged on all assets that are given away if the person making the gift passes away within 7 years. There is however an IHT nil rate band of £325,000. This means the first £325,000 of disposals is not liable to the IHT charge.  IHT is usually charged at a rate 40% tax on any asset over the IHT threshold. For example, you gift a property worth £1 million to a son, the first £325,000 is exempt, but IHT will be payable on the balance, giving an amount due of £270,000.

The IHT can be reduced in various circumstances. One way this could be achieved is if 10% of the value of the estate is gifted to charity. As a result of this, the rate of IHT drops from 40% to 36%.  Another way to reduce the tax rate is if the person giving away the asset does not pass away within 7 years of gifting. In this scenario, the asset is free of an IHT charge if 7 years or more have passed. Finally, if you die, and the assets are passed onto a spouse (provided they are UK Domiciled) then these assets will be exempt of the IHT. In addition to this, the IHT threshold for that spouse is then doubled, so it will now be £650,000.  There are of course many rules and restrictions in relation to these points.

Each individual is also entitled to an Annual Inheritance Tax Exemption which entitles you to give away the first £3,000 each year exempt of IHT. This exemption also allows you to carry over the unused limit to the following year meaning you can have a total of £6,000 which is IHT exempt.  There is however no further roll-over.  On top of this, small gifts of up to £250 per person (for up to 12 people) are eligible for IHT exemption.

By forward thinking and effective tax planning, it will be possible to minimise the need to pay inheritance tax. If you would like help with reviewing your inheritance tax position or any other tax planning issues, please contact Wisteria on 020 8952 0140 or info@wisteria.co.uk where we will be more than happy to help.