Introduction to inheritance tax planning

David Alexander
August 17, 2009 — 1,339 views  
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Death duties have been with us for centuries, in the guise of Estate Duty, Capital Transfer Tax and now Inheritance Tax (IHT). Irrespective of the name, the purpose has always been the same; to raise revenue from the estates of citizens.

Once considered a tax on the truly affluent, IHT now affects more estates than ever. It will undoubtedly come as a shock to many to discover that a large proportion of their wealth or estate, which includes all their assets including: the family home, investments, life assurance policies not in trust, and even old family heirlooms might actually have to be sold in order to meet the tax liability on death. It is not usually possible to sell assets until after a Grant of Representation, for example Probate, has been obtained and this is not normally possible until the IHT is paid.

While most people are aware of the existence of IHT, it is a subject which gives rise to some distaste or lack of interest and many, not surprisingly, would rather delay consideration of the matter. So few people do anything about their potential IHT liability, the result is that the HM Revenue & Customs (HMRC) anticipate collecting £3.1 billion in respect of 2008/2009* alone.

The first £325,000 (2009/2010) of an individual's estate (referred to as the nil rate band) is taxed at 0% and is not therefore liable to IHT. The entire estate in excess of the nil rate band is taxed at a flat rate of 40%.The table below shows the effect this tax can have on an estate and how HMRC could easily become the single largest beneficiary.

inderitance tax

Note: For married couples and civil partners any unused portion of the nil rate band is transferable from the first to die to the survivor.

*HM Revenue and Customs 2009

**Rounded to nearest whole percentage Who is liable?

All individuals domiciled in the UK are subject to IHT on 'transfers of value' of all their worldwide assets with the exception of excluded property - see below. Those who are not UK domiciled are only subject to IHT in respect of their UK assets. The issue of domicile is beyond the scope of this brochure, however, the domicile of an individual is generally the country where he or she permanently resides or intends to remain in the future - often referred to as 'where your heart is'.

Furthermore, for the purposes of IHT only, there is the concept of 'deemed domicile', which applies where:

* The individual has been resident in the UK in 17 out of the last 20 tax years, or

* The individual was domiciled in the UK within the previous 3 tax years.

Excluded Property

Certain assets are excluded from IHT. These include:

* A reversionary interest under a trust.

* Non UK assets, ie assets not situated within the UK. However, the individuals beneficially entitled to these assets must be domiciled outside the UK or the assets must be held in a trust created at a time when the person who created the trust (the settlor) was non UK domiciled.

What is a transfer of value?

A transfer of value for IHT purposes is any action or omission (usually a gift) in relation to your estate,which reduces its value. This can be during your lifetime or on death. It is not necessarily measured by the value of the asset gifted. It is calculated by reference to the loss to your estate, ie by looking at the value of the estate before, and after, the gift is made, in order to calculate the loss and therefore the value transferred.

Transfers of value will be one of three types:

* Exempt Transfers. These are transfers where IHT will never be payable.

* Potentially Exempt Transfers (PETs).These become exempt if the donor survives seven years from the date of the gift.

* Chargeable Lifetime Transfers (CLTs).These may result in an immediate lifetime charge to IHT of 20%.

you can read the complete guide at Introduction to Inheritance Tax

About the Author

David Alexander heads up AAG, a leading UK wealth management company based in Mayfair, London. Alexander began his career as a financial advisor in 1988, rapidly earning a reputation for sound and innovative financial advice while representing CitiBank, amongst others.

David Alexander