Factsheet: Inheritance tax
What is inheritance tax?
It is a tax paid to the Inland Revenue on death, where the value of an estate exceeds the Nil Rate Band . The Nil Rate Band is currently £312,000 and has changed every year in the budget.
Inheritance tax is paid on an individual’s estate at a rate of 40% of the figure over and above £312,000. This means that a fair proportion of an estate can go to the Inland Revenue before your family receive anything.
How can I reduce the inheritance tax that my estate must pay?
When an estate exceeds £312,000 one way to reduce the inheritance tax payable is through lifetime tax planning:
Lifetime tax planning
If you give your assets away as gifts, but die within seven years of making the gift, then your estate will still have to pay inheritance tax on the value of the asset when you gave it away. This is called the seven year rule. However, the following gifts are not affected by the seven year rule:
- the annual exemption – currently £3,000. If you did not give away £3,000 last year, then this tax year you can give away a total of £6,000
- gifts to a charity, certain political parties, and a spouse
- excess income unspent per year, no matter what the total is. The word “excess” is important, because if you give income away, and then have to resort to capital sources to keep you in the lifestyle to which you are accustomed, the rule does not apply. Any gifts of income you make would still fall back into your estate under the seven year rule
- marriage gifts to each child of £5,000 and each grandchild of £2,500 may be made by each parent
- gifts up to £250 in value to any individual, in any tax year you have not already given any part of the annual exemption to. There is no limit to the number of people who may benefit
- certain businesses and agricultural holdings attract a relief from inheritance tax at a rate of either 100% or 50%
Writing insurance policies into trust
If you have an existing life policy which pays out on death, you may be able to arrange with the insurance company to write it in trust.
- if you place a policy in trust, and survive for seven more years, the value of the policy when it pays out on death is not part of your estate, and therefore not liable for inheritance tax
- you can take out a policy of insurance specifically designed to pay the cost of any inheritance tax bills with the proceeds, on your death
Investments
There are certain investment products on the market which may enable you to invest a sum of money with a company which results in the capital you have invested being discounted immediately for inheritance tax purposes. Even with these investments, you can draw an income.
Contact Maureen Want on 020 8367 3999
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