Inheritance tax is something most people do not worry about but probably should do, given the way house prices have risen over recent years.
As a result of soaring property prices many individuals and couples will find that they have been pushed over the current thereshold. For those with concerns tax planning is essential.
The threshold
You only have to begin paying IHT at a certain point, the rate of which is a hefty 40%.
For the tax year 2008-2009 it was £312,000, in 2009-2010 is £325,000 (£650,000 for couples).
But in 2010-2011, the threshold was meant to rise yet again to £350,000, and £700,000 for couples.
However in his 2009 pre-Budget Report, chancellor Alistair Darling, announced he would be freezing the threshold at £325,000 for individuals and at £700,000 for couples until 2011 in order to help tackle the nation's eye-watering deficit.
The Tories had promised to raise this to £1m, but decided to maintain the freeze at the coalition's Emergency Budget in June 2010 - the Government's debt mountain proved too large.
If the value of your estate, including your home and certain gifts made in the previous seven years, exceed the threshold, tax will be due on the balance at 40%.
Inheritance inclusions
A person's estate includes everything owned in their name; the share of anything owned jointly; gifts from which they keep back some benefit, such as a home given to a son or daughter but still lived in by the parent; assets held in some trusts from which they receive an income.
Against this total value is set everything that the deceased person owed, such as, any outstanding mortgages or loans, unpaid bills, and costs incurred during their lifetime for which bills have not been received, as well as funeral expenses.
This is Money's IHT guide gives you the basics. We can also send you a more detailed guide in the post to read at your leisure. Request a free guide
Avoiding IHT
Any amount of money given away outright to an individual is not counted for tax if the person making the gift survives for seven years. These gifts are called 'potentially exempt transfers' and are useful for tax planning.
Money put into a 'bare' trust - a trust where the beneficiary is entitled to the trust fund at age 18, counts as a potentially exempt transfer, so it is possible to put money into a trust to stop grandchildren, for example, having access to it until they are older.
However gifts to most other types of trust will be treated as chargeable lifetime transfers. Chargeable lifetime transfers up to the threshold suffer no tax but amounts over are taxed at 20% with a further 20% payable if the person making the gift dies within seven years.
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Gifts that are exempt
Some cash gifts are exempt from tax regardless of the seven-year rule. They include: wedding gifts of up to £5,000 to each of your children; wedding gifts of £2,500 to each grandchild, and wedding gifts of £1,000 to anyone else; other gifts of up to £3,000 a year (plus any unused balance of £3,000 from the previous tax year); gifts of up to £250 each to any number of people each year; gifts to charities, the National Trust, national museums, the main political parties and most registered housing associations.
Help with cutting your inheritance tax billnull
Inheritance tax calculator Professional advice: Cut your IHT liability Ten steps to reducing IHT Tax advice from the experts How to make a willRegular gifts from after-tax income, such as a monthly payment to a family member, are also exempt as long as the giver still has sufficient income to maintain their standard of living.
Any gifts between husbands and wives are exempt from IHT whether they were made while they were both still living or left to the surviving spouse on the death of the first. Tax will be due eventually when the surviving spouse dies if the value of their estate is more than the combined tax threshold, currently £650,000.
Death within the seven-year period
If gifts are made that affect liability to IHT and the giver dies less than seven years later, a special relief known as taper relief may be available. The relief reduces the amount of tax payable on a gift. (See table below)
When the tax must be paid
In most cases, IHT must be paid within six months from the end of the month in which the death occurs. If not, interest is charged on the unpaid amount. Tax on some assets, including land and buildings, can be deferred and paid in instalments over 10 years.
Though if the asset is sold before all the instalments have been paid the outstanding amount must be paid. The IHT threshold in force at the time of death is used to calculate how much tax should be paid.
Updated November 2010, Dan Hyde, This is Money
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