Inheritance Tax (IHT) is an increasingly significant problem for many people, but it is also sometimes described as a ‘voluntary tax’ because it is a tax that, with proper forward planning, can usually be largely avoidable.
IHT taxes a person’s wealth at the date of death and will also ‘catch’ transfers of assets they have made in the previous seven (and in some instances up to 14) years, with a sliding scale applying to reduce the tax charge for ‘older’ transfers.
Formal IHT planning exercises are not for everyone, but there are several straightforward exemptions and reliefs available, although some of these apply only in quite specific circumstances. Where there are substantial assets, however, planning for IHT is a wise precaution.
Where the value of the estate for IHT purposes exceeds the ‘nil rate band’, the standard rate of IHT charged is 40 per cent (this may be reduced if substantial gifts are made to charity).
There are, however, a number of asset transfers which are outside the scope of IHT.
Firstly, a person can give as many gifts of £250 per year per person as they wish. So, for example, if you were to give £250 each to four grandchildren, £1,000 per year could be transferred out of your estate.
In addition, an annual exemption of £3,000 applies and, if not fully used, the shortfall can be ‘rolled over’ to the next tax year.
Where a gift is made in anticipation of marriage, a further exemption applies – £5,000 for a transfer by a parent, £2,500 by a grandparent or £1,000 by any other person.
One substantial relief which is available is often neglected. Where gifts are made ‘out of surplus income’, they are exempt from IHT no matter what the sums gifted are. Surplus income is the after-tax income available after all normal expenditure needs (this would include holidays and so on) have been met. To qualify for this exemption, the gifts must normally be regular (so the use of standing orders is often sensible) and it is recommended that sufficient records are kept to justify the treatment of the payments as gifts out of surplus income. At the core of the eligibility is that the normal lifestyle of the donor has to be maintained notwithstanding the gifts.
Lastly, payments made for the training, education or maintenance of a child or spouse or for the maintenance of a dependent relative are not normally transfers for IHT purposes.