Surrey Property: Inheritance Tax Laws
Prior to 1986, the UK had a comprehensive tax on both general transfers and estate transfers – the Capital Transfer Tax, or CTT. This was replaced by the Inheritance Tax, or IHT.
Inheritance tax applies to your estate, broadly defined as the sum total of the assets you own when you pass away with your outstanding debts factored out. The Inheritance tax also applies in certain specific circumstances to asset transfers made during your lifetime. In this context, “assets” is a term that includes property, liquid funds, investments, and your possessions. For more advice and further definition of these terms, consult with Herrington Carmichael solicitors in Camberley, Surrey.
The Inheritance tax does not apply to every citizen. With proper estate planning, the negative effects of the tax can be avoided by virtually anyone.
IHT has a lower threshold below which it is never applied. For the 2006-2007 tax year, this threshold (technically called the nil rate band in professional circles) was set at £300,000. If your estate’s taxable value falls below this threshold when you die, you do not pay IHT.
You have a number of other options allowing you to pass on assets without paying Inheritance Tax. You can use exemptions in certain circumstances either during your lifetime or in the arrangements you make in your will. Examples include:
* If your primary inheritor is a husband, wife, or civil partner and you’re both UK residents, Inheritance Tax does not need to be paid even if your estate exceeds the £300,000 threshold.
* If you transfer ownership of an asset more than seven years prior to your death it is exempt from IHT. (Note that there are other rules which apply to companies and trusts.)
* Certain gifts and charitable donations are exempt. These include wedding or civil partnership gifts of up to £5,000 or other gifts of up to £3,000. The exact limits depend on the relationship between the gift-giver and the recipient.
Sadly there are still a lot of people out there who are unaware that they may be leaving behind a significant tax burden to their families after they pass on. Inheritance taxes need to be paid within six months of an individual’s death, and settling the tax obligation is a necessary prerequisite to disposing of the person’s estate. In many cases, relatives end up relying on bridging loans to meet their new inheritance tax obligations.
In the five years leading up to tax year 2003-2004, the number of estates subject to IHT rose by over 70 percent. 71 percent of the new estates owing tax fell below the £500,000 mark.
Under the leadership of the Labour party, the IHT’s payout has increased significantly. The tax produced £1.7 bn. in the 1996/97 tax year; by 2005/06 this take had grown to £3.3 bn.
As I mentioned above, nobody needs to pay the IHT if they make the proper preparations. I provide professional estate planning services to many clients, and the number of people I’ve encountered who would prefer to turn over money to the taxman rather than their loved ones and descendants is astoundingly small.
Let’s examine some common strategies for minimizing – if not eliminating – your IHT bill. The first step is to have a plan in place. The time to start is now.
Get a will writer to draw up a will that makes good use of the nil rate band allowance. If you have a spouse or civil partner, remember that you can easily move assets between each other without running into any tax liabilities. With a will writer’s assistance, you should be able to make full use of the nil rate band afforded to each of you. With proper allocation, you could reduce your inheritance tax bill for 2007/08 by as much as £120,000.
The next principle to bear in mind is that you have no tax obligation on assets you don’t own. Putting as much as you can outside the bounds of your estate is important. Life insurance plans should be held under trust if at all possible. Death benefits from employers should similarly be arranged to pass directly to their recipients without landing in your estate.