Inheritance Tax (IHT) is the tax on an estate when an individual dies. Although many individuals express a valid argument that tax has already been paid on those assets; its main purpose is to redistribute income across the economy.
Individuals have an allowance of £325,000, whereby they are free from IHT. If an individual’s estate overtakes this allowance, the remaining value will be taxed at 40%. Married couples can benefit from a joint tax free sum of £650,000 (upto 100% of the surviving spouses allowance).
Methods to Reduce / Mitigate IHT
• Trusts – placing cash/investments/property into trusts automatically moves those assets out of your estate and after 7 years, no IHT can be charged. Growth from any of these assets fall outside of the estate immediately.
• Charity – donating at least 10% of your assets to charity can help reduce your inheritance tax charge to 36% instead of 40%.
• Whole of Life (WOL) policies – these protection policies take regular contributions of your income and guarantee you a sum assured, if placed into a trust; it puts that money outside of your estate, reducing your inheritance tax by spending regular excess income. The sum assured could also be used to pay any Inheritance tax payable.
Gifts – gifts can be made, after seven years, this gift no longer falls within your estate, (if you no longer receive the benefits) therefore this money/investment/property will be free from IHT. However, certain gifts can be made which immediately falls outside of your estate such as:
Some gifts made during your lifetime are exempt from Inheritance Tax because of the type of gift or the reason for making it. Wedding or civil partnership ceremony gifts are exempt from Inheritance Tax, subject to certain limits:
• parents can each give cash or gifts worth £5,000
• grandparents and great grandparents can each give cash or gifts worth £2,500
• anyone else can give cash or gifts worth £1,000
You have to make the gift on or shortly before the date of the wedding or civil partnership ceremony. If the ceremony is called off and you still make the gift this exemption won’t apply.
You can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. However, you can’t give more than £250 and claim that the first £250 is a small gift. If you give an amount greater than £250 the exemption is lost altogether. You also can’t use your small gifts allowance together with any other exemption when giving to the same person.