IHT – The Background
Having striven all one’s life to build up assets (after the incidence of Income Tax, Capital Gains Tax, VAT, etc) to secure financial peace of mind and to pass wealth on to one’s family eventually, it may seem unfair that a person, or rather their family, is then taxed again on those accumulated assets on death. Nevertheless, this “double” taxation exists and dates back to the introduction at the end of the last century of what might generically be called death duties. The tax applies to all estates over £325,000 in value and is levied at 40%.
Of course, Inheritance Tax is something of a political tax and there is no guarantee that the current rules will not be tightened, the tax rate increased and planning opportunities reduced. This is particularly so at the present time with the dearth of tax revenues flowing into the Treasury.
Inheritance Tax can have disastrous consequences for families and lead to a very substantial part of a person’s estate being paid to Her Majesty’s Revenue & Customs. An unwelcome Inheritance Tax bill may necessitate the sale of family assets which the family would have preferred to attain. Such a forced sale may come at a difficult time and result in less than full value being obtained. The tax can have a particularly devastating effect if the assets are not easily realisable. Substantial borrowings might be needed, and these may be difficult to service or redeem.
Worst of all, Inheritance Tax can create financial problems and anxiety for a person’s family.
IHT Current Regime
IHT is charged on transfers of capital by individuals. It maybe payable on certain lifetime gifts, on wealth at death, on certain transfers into and out of the trusts and on certain transfers made by close companies.
Every UK domiciled individual has a IHT threshold whereby no IHT is payable. Currently the nil rate band is £325,000 where a surviving spouse or civil partner dies a claim may be made for any part of the nil rate band unused on the death of the first spouse or civil partner to die, to be added to the survivors own nil rate band. Therefore, the nil rate band could be as much as £625,000.
How we can help?
Specialist advice and sensible tax planning can reduce, if not eliminate, the tax burden and alleviate the difficulties the liability might otherwise cause.
Although not a comprehensive list, sensible tax planning steps can involve:
- Maximising reliefs and exemptions to minimise the ultimate liability;
- The use of trusts, to retain a degree of control while removing the asset form the person’s estate;
- Tax effective and flexible wills;
- Lifetime giving, while ensuring attendant Capital Gains Tax implications are minimised;
- Moving ownership of assets around a family for greater tax effectiveness;
- Tax planning arrangements in connection with the family home;
- Avoiding pitfalls, such as the gift with reservation of benefit provisions and the Pre-Owned Assets rules and the new rules relating to trusts;