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Inheritance Tax

The Fisher Jones Greenwood Guide to Inheritance Tax on Death and Inheritance Tax Planning is split into the following sections:-

  • An in-depth guide to Inheritance Tax payable on death, exemptions and reliefs
  • A series of frequently asked questions with answers
  • Details of how we can help you in connection with Inheritance Tax Planning

INHERITANCE TAX – Changes to the use of allowances for married couples and civil partners as from 9th October 2007

Chancellor Alistair Darling has announced that married couples and civil partners are now able to combine their nil rate Inheritance Tax allowances for deaths on or after 9th October 2007.

This amendment is backdated indefinitely, so when a surviving spouse (or civil partner) dies on or after 9th October 2007, the estate of both of them will need to be considered together. For example this could have the effect of saving £124,800 (£312,000 x 40%) for a second death in 2008/2009 tax year.  

By this measure, the government are giving married couples and civil partners the same tax saving benefit as that gained by couples who had previously written tax planning wills.

Those with existing tax planning wills (e.g. Nil Rate Band Discretionary Trusts) where both parties are still alive may now wish to consider whether their wills still work for them, or whether they would now prefer simpler ones.

Where one party has already died, and a NRBDT is up and running, these can carry on as they are unaffected.

In-Depth Guide

The Finance Act 1986 introduced Inheritance Tax to replace capital transfer tax from the date of the Act for transfers made on or after 18 March 1986. It applies to "transfers of value". These are transfers which reduce the value of the transferor's estate and the main charge arises on transfers made by an individual on death.

Some lifetime gifts may give rise to an Inheritance Tax charge. Outright gifts between individuals become exempt from tax providing the transferor survives 7 years from the date of the gift and during that period they are called potentially exempt transfers.

If the transferor is domiciled in the United Kingdom the tax applies to all that person's property wherever situated. If the transferor is domiciled abroad, the tax usually applies only to property situate in the United Kingdom.

This guide is designed to help you calculate whether your personal representatives will have to pay Inheritance Tax on your estate when you die.

The Amount of Inheritance Tax Payable

This will depend on the value of the estate of the deceased and the value of any gifts he or she has made within the previous 7 years. No tax is payable on the first part of the cumulative total. This nil-rate band, or threshold, is increased each year in the Budget and is £312,000 for 2008/2009. If no lifetime gifts have been made and the value of the deceased's estate is under £312,000, then no tax is payable. Tax is then charged at a single rate of 40% on amounts above the threshold of £312,000.

Exemptions

Not everyone has to pay Inheritance tax. The main exemptions are as follows:-

  • Transfers between spouses. These are wholly exempt where
    a) both parties are domiciled in the UK; or
    b) if both parties are domiciled outside the UK; or
    c) if the transferee(the person to whom the gift is made) only is domiciled in the UK.
  • Charities. There is no limit on the amount that can be given to charity and gifts to charities are wholly exempt up to any amount provided certain conditions are not breached. We can advise on these.
  • Gifts to political parties. Again, there is no limit on the amount which can be given so long as certain conditions are not breached.
  • Gifts for national purposes etc. There is a list of 19 bodies and institutions specified in Schedule 3 of the Inheritance Tax Act 1984 and a few examples are set out below. Gifts to any one or more of these bodies are exempt without limit. The National Gallery; The British Museum; any other similar national institution; any library, local authority, government department, university or university college in the United Kingdom.
  • Gifts for public benefit. Gifts without limit can be made to bodies not established or conducted for profit such as land which is of outstanding scenic, historic or scientific interest.

Reliefs

Both business property and agricultural property receive favourable treatment.

  1. Business Property relief. To qualify, the property must be "relevant business property" and must have been owned by the transferor for the period of two years immediately preceding death. Where death occurs after 10 March 1992, relief is given by reducing the value of the asset by 100%. Prior to 10 March 1992, the relief was 50%. We can advise on "qualifying relevant business property".
  2. Agricultural Property relief. Agricultural property is defined as "agricultural land or pasture and includes woodland and any buildings used in connection with the intensive rearing of livestock or fish if the woodland or building is occupied with agricultural land or pasture and the occupation is ancillary to that of the agricultural land or pasture; and also includes such cottages, farm buildings and farmhouses, together with the land occupied with them as are of a character appropriate to the property." Where death occurs after 10 March 1992 relief is given by reducing the value of the property by 100% certain conditions apply. Prior to that date the relief was 50%.

Frequently Asked Questions

 

What is the current Inheritance Tax threshold?

If the person died after 6th April 2007 it is £312,000.

Who is responsible for paying Inheritance Tax when someone dies?

To obtain a Grant of representation the personal representatives must pay all the inheritance tax for which they are liable when they deliver their account to the Inland Revenue.

Does it all have to be paid at once?

Not if the personal representatives do not wish to pay it. In the case of certain property the tax may be paid in 10 yearly instalments with the first instalment falling due 6 months after the end of the month of death. We can advise you on what assets the instalment option is available.

How FJG Can Help

Inheritance Tax Planning

We can advise on steps you can take to save Inheritance Tax.

Certain steps can be taken during your lifetime such as making regular gifts within the annual exemptions or making larger gifts which will be tax-free if you survive the gift by 7 years.

We can also recommend Independent Financial Advisers who can advise you on how to invest your assets tax-efficiently and on insurance cover to finance potential Inheritance Tax liability.

For further information please contact Kate Wombwell on: KWombwell@fjg.co.uk, Susanne Grimwade on SGrimwade@fjg.co.uk or Richard Hildrow on RHildrow@fjg.co.uk