Wills and Inheritance tax

What you need to know about inheritance tax

Inheritance Tax (also known as IHT) is essentially a tax on death. The current rate of tax is 40% payable on all assets over £325,000 (from April 2009). It is now possible for spouses and civil partners to transfer their unused inheritance tax nil rate band allowances.

Inheritance Tax exemptions

There are a number of exemptions to IHT, these are:

The nil rate band (Inheritance Tax threshold)

You only pay Inheritance Tax on cumulative transfers of assets over £325,000 (in 2010-2011). Below this figure it is a "Nil Rate Band". £325,000 may sound like a lot, but remember it is absolutely everything that you own - including your house.

Transfers between spouses

No Inheritance Tax is paid on any transfer of assets on death from husband to wife (if both have the same domicile), or vice versa. Whilst this appears very generous it often merely delays the IHT liability until the other spouse dies. Since October 2007 it is possible for spouses and civil partners to transfer their unused inheritance tax nil rate band allowances.

Annual gift of £3,000

You can give away up to £3,000 worth of gifts every year to whoever you like, and if you can afford to do so, you should try and use this exemption every year.

Gifts out of income

Regular gifts out of surplus income, as opposed to capital, are exempt from Inheritance Tax. This is a little used, but quite useful exemption, but gifts do need to be regular.

Small gifts of up to £250

This is £250 per person, but it cannot be the same person you gave the £3,000 annual gift to. Useful if you have plenty of cash and several grandchildren.

Gifts on marriage

You can give £5,000 to your own child on their getting married, £2,500 to your grandchild and £1,000 to anyone else. Only applies to one marriage per person unfortunately.

Gifts to charities

Any gifts to charities are exempt from IHT .

Potentially Exempt Transfers

There are also what are called Potentially Exempt Transfers (PETs). Most gifts in excess of the exemptions given above made during your lifetime are exempt at the time that they are made, but are subject to your surviving for seven years after the gift was made. If you survive the full seven years then there is no liability to Inheritance Tax. If you die within this period of time then IHT will become payable. It may be at a reduced rate, but this only takes effect if you have given away more than £300,000 within three to seven years of your death.

It is important to obtain professional legal advice when drawing up a Will. If the value of your estate exceeds £325,000, careful tax planning is advisable.

What is a trust?

A trust is a legal arrangement where one or more 'trustees' are made legally responsible for holding assets. The assets - such as land, money, buildings, shares or even antiques - are placed in trust for the benefit of one or more 'beneficiaries'
The trustees are responsible for managing the trust and carrying out the wishes of the person who has put the assets into trust (the 'settlor'). The settlor's wishes for the trust are usually written in their will or set out in a legal document called 'the trust deed.'

The purpose of a trust

Trusts may be set up for a number of reasons, for example:

  • to control and protect family assets
  • when someone is too young to handle their affairs
  • when someone can't handle their affairs because they are incapacitated
  • to pass on money or property while you are still alive
  • to pass on money or assets when you die under the terms of your will - known as a 'will trust'
  • under the rules of inheritance that apply when someone dies without leaving a valid will (England and Wales only)