Love it or loathe it (and most agree with the latter), Inheritance Tax will need to be front and centre of your estate planning for the foreseeable future. Inheritance Tax (IHT) was first introduced in 1986, replacing Capital Transfer Tax, which in 1975 became a successor to Estate Duty.
Making provision for IHT in your estate planning has become more important than ever following the freeze on the £325,000 lifetime exemption. With rising rates of inflation eroding its value every year, and rising house prices pushing estate values up, more and more bereaved families are being subjected to higher Inheritance Tax fees.
You literally can’t give it away
Well, you can, but if you make a gift to someone and die within 7 years of that gift, they’ll need to pay IHT on it. As the gov.uk website explains:
“Any Inheritance Tax due on gifts is usually paid by the estate, unless you give away more than £325,000 in gifts in the 7 years before your death. Once you’ve given away more than £325,000, anyone who gets a gift from you in those 7 years will have to pay Inheritance Tax on their gift.”
So that appears to be a “double whammy”, with tax applied to what you give away as well as what you bestow in your will.
The good news is that effective estate preservation planning could save your family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds.
Who pays IHT globally, and how much?
Inheritance tax in one form of another is levied in many countries - but not all. According to Ernst Young the tax simply doesn’t exist in Mexico, Australia, Canada, Austria, Cyprus, Norway and Sweden, for example.
Rates vary too.
- In Belgium, you can pay up to an eye-watering 80% inheritance tax
- Japan - up to 55%
- Denmark - up to 52.06%
- Germany, Switzerland and South Korea - up to 50%
- France - up to 45%
- USA, Greece, Netherlands and UK - up to 40%
Reducing the amount of IHT beneficiaries have to pay
Inheritance Tax is usually payable on the value of a deceased person’s estate, but it does depend who you leave your estate to in your will. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if your spouse or registered civil partner is domiciled outside the UK.
Your marital status is also very important. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules. However, there are steps you can take to reduce the amount of money your beneficiaries have to pay if Inheritance Tax affects them.
If you leave your estate to someone other than your spouse or registered civil partner, that’s known as leaving it to a non-exempt beneficiary. In that case, Inheritance Tax would be payable on the amount that exceeds the nil-rate threshold, currently frozen at £325,000 (at time of writing).
UK 40% Inheritance Tax
Every individual is entitled to leave an amount of their estate up to the value of the nil-rate threshold to a non-exempt beneficiary without incurring Inheritance Tax.
What’s more, if a married widow or widower has not used their entire nil-rate band, the nil-rate band applicable at the time of death can be increased by the percentage of the nil-rate band unused on the death of the deceased spouse. This is provided your executors make the necessary elections within two years of your death.
On a person’s death, gifts made during their lifetime that are not exempt transfers must be taken into account when calculating the total amount of Inheritance Tax payable.
For more details on estate planning and IHT, read/download our “Guide to Estate Preservation” here.
Taper relief on gifts
The IHT 40% rate reduces to 36% if the estate qualifies for a reduced rate as a result of a bequest to charity. Inheritance Tax may also become payable on the lifetime gifts themselves . However, gifts made between 3 and 7 years before your death could qualify for taper relief, which reduces the amount of Inheritance Tax payable.
IHT instalments on property, land and shares
Executors or legal personal representatives usually have six months from the end of the month of death to pay any Inheritance Tax that is due. The estate can’t pay out any monies to the beneficiaries, or sell any assets, until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.
Need advice on how to reduce your beneficiaries’ IHT tax bill?
We can help. Contact us to discuss your particular circumstances and your estate planning requirements.