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Freeze on Inheritance Tax Threshold

February 20, 2013
Wills, Trusts and Probate

The government announced recently that the “nil-rate band” would remain at £325,000 for an individual (potentially £650,000 for a couple) until 2019, in order to help fund the £1bn shortfall in the cost of reforming social care. Assets above £325,000 are subject to Inheritance Tax (IHT) at the rate of 40%, and it is estimated that the number of estates liable to IHT will increase significantly by 2019.

The tax threshold will remain the same and estates paying IHT are not now limited to the wealthy. Hard working families who have tried to make savings during their lives, to enable their children to have a decent inheritance, are now caught by IHT. The nil-rate band has now been at the £325,000 level since 2010. Prior to then it had increased with inflation. Many more people are now taking advice in order to mitigate their IHT liability. So, what options are available? More than you may think! Exempt Gifts: The easiest solution to reducing your estate for IHT purposes, is to make gifts. Each individual has an annual allowance of £3,000 (this can be to a number of people up to this limit or to one person). In addition, there is a small gift allowance of £250, which can be paid to as many separate individuals as you choose. If you have not used your annual allowance in the previous tax year, this can be carried forward to the following tax year. Gifts between spouses are exempt for IHT purposes so potentially a couple can gift £12,000 if they have not used their previous year’s allowance. A much under-utilised concession, is the is the ability to make a gift out of income. Regular gifts can be made from excess income, as long as it does not impact on your standard of living. This is particularly useful for people with higher incomes. Parents can make wedding gifts of up to £5,000 per child and grandparents up to £2,500 per grandchild. Others can gift up to £1,000 as a wedding gift.

Gifts to charities are exempt from IHT and if you gift at least 10% of your estate to charities this will attract a lower rate of IHT (36% as opposed to 40%) Potentially Exempt Transfers: Of course anyone can make more substantial gifts than those mentioned above but you must survive for seven years from the date of the gift for that gift to be exempt from IHT. If you die within the seven year period, the value of the gift is added back into your estate for IHT purposes. If the person receiving the gift does not get the full benefit of the gift, the value of the gift is added back into your estate e.g. if you gift your house to your children but remain living in it without paying market rent, then the value of the house remains in your estate for IHT purposes. Trusts: You can make gifts into discretionary trusts and again, after seven years, these will be exempt for IHT purposes. 

As long as the gift (cash, property etc.) is under the IHT threshold there will not be a tax charge. You can gift more than the threshold, but tax would be payable at 20% on the amount above the IHT threshold, then 6% on all assets above the threshold every 10 years, and possibly an exit charge when the trust fund is transferred out of your estate. Insurance: You can take out a life policy to cover an IHT bill. If you write the policy in trust, then the proceeds of the policy will not form part of your estate. Other reliefs: If you own a business or agricultural property (and providing certain conditions are met) then two important reliefs are available, Business Property Relief and Agricultural Property Relief. In general, a business you control will attract Business Property Relief of 100%. In other words, your business can be passed on with no Inheritance Tax being paid. Assets owned by you, but used by a partnership in which you are a partner, or a company you control, will attract Business Property Relief of 50%. 

 For agricultural property to qualify for Agricultural Relief, it must be located in the UK, the Channel Islands, the Isle of Man or the European Economic Area, and it must be part of a working farm. You must also have owned it for at least two years before your death, and if you have let the property out you must have owned it for seven years before your death. If the property qualifies, Agricultural Relief is usually given at 100%. The team at stevensdrake Private Client department is available to discuss your Inheritance Tax concerns.

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