Inheritance Tax Planning

Inheritance tax is a tax payable on capital which passes on death but it also applies to some lifetime gifts that were made less than seven years before the death occurred.  Inheritance tax is levied on the value of transfers and on death a person is deemed to make a transfer of his estate to his personal representatives.  The following however are exempt from tax, gifts of up to £3000 per annum and gifts between spouses.  Any gifts which fall outside the exempted categories may be classed as potentially exempt transfers; these are transfers which would be exempt providing the giver survives the gift by seven years.
 
The tax therefore is payable on the cumulative total of chargeable transfers made by the transferor.

Once the total of the chargeable transfers is known, in other words once the estate has been valued, the first slice of an individuals estate is generally free of inheritance tax and this is referred to as the nil rate band, which is currently £312,000.  The amount of an individual’s estate which exceeds the nil rate band is thereafter taxed at 40%.

As transfers between spouses including transfers on death are exempt from inheritance tax, assuming the resident spouse is resident in the UK, there is no tax to pay on the death of the first spouse if all the assets are left to the survivor.  However the combined estate is then taxed when the survivor dies.  Recent changes to the inheritance tax laws can mean that a widow/widower can now utilise his or her deceased’s spouse Nil Rate Band and therefore have a double nil rate band tax allowance to apply to their estate on death e.g. £624,000 of tax free estate (based on 2008 – 2009 rates).

A person may want to consider tax planning within his or her Will and the effects lifetime gifts would have on the estate for inheritance tax purposes.