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According to Wikipedia, “From 1796, small inheritance taxes, then called legacy, succession and estate duties were collected, in England and Wales on estates over a certain value by stamping deeds and by stamping wills admitted to probate, similarly to stamp duty.” Although the levels of Inheritance Tax have been the subject of debate amongst the political parties it looks as though it is here to stay.

In 1975 Estate Duty was replaced by Capital Transfer Tax and finally in 1986 by Inheritance Tax (IHT). Whatever it’s called it amounts to the same; a tax on death. However, IHT can also apply as a result of gifts made in an individual’s lifetime and is also payable by certain types of trust.

For many IHT isn’t something we think about often…until you are faced with finalising an estate for a parent or spouse. It’s surprising how many of us have a liability we hadn’t even considered, especially with the rise in property values over the last 50 years.

Here is your “in a nutshell” guide to IHT

IHT should be considered whenever assets are transferred either by an individual during their lifetime or under a Will on death. There are various reliefs and exemptions that make IHT so complicated,

  • A lifetime gift that does not exceed £325,000 is exempt from IHT.
  • Lifetime gifts to a spouse are exempt from IHT when made during an individual’s lifetime or under a Will. The exception to this is where a spouse is domiciled outside the UK.
  • Gifts to UK registered charities made either during an individual’s lifetime or under a Will are exempt.
  • Annual gifts of up to £3,000 in any one year are exempt from IHT. If unused, this annual allowance can be carried forward to give an annual exemption of £6,000. It should be noted that if the allowance is not used in the following year, it cannot be carried forward any further. For example the 2010/11 allowance could be utilised in 2011/12 but not in 2012/13.
  • Gifts of up to £5,000 can be made from a parent to a child upon the child’s wedding but to be exempt, any gifts must be made before the wedding. Grandparents may make gifts of £2,500 upon a grandchild’s wedding and other parties can gift £1,000.
  • Gifts out of income are exempt from IHT providing they do not affect the donor’s standard of living and are not funded from capital.
  • Lifetime gifts to other individuals and certain types of trust not covered by these exemptions are classed as Potentially Exempt Transfers (PETs). In order for the PET to be fully exempt the donor must live for seven years from the date of the gift.

I will pick up in my next blog what you can do to minimise your liability for IHT, but if you feel this may be an issue for you, don’t leave it until then - pick up the phone and have a chat with us. We often find that some people worry unnecessarily and when we sit down and look at their situation we find that by using their exemptions their estate does not have a liability to IHT after all.

The Financial Services Authority does not regulate Tax and Trust advice or Will writing.

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