In simple terms, Inheritance Tax or IHT is a tax that applies to transfers of value. This means that technically, IHT applies to everybody and all gifts or transfers of assets that are carried out. Upon death, your estate is gauged for Inheritance Tax. IHT has to be paid off before the estate is distributed to the beneficiaries. If the tax is not settled, then the entire estate is frozen until the money is raised to pay off the tax bill.
The main reprieve against IHT is what is called “the nil-rate band”. This band allows estates with values up to £325,000 (2013/2014) to be free of IHT.
Keep in mind however, that all the assets that were Income Tax or Capital Gains Tax exempt, will be counted in the total value of your estate. Considering the high property prices in the last decade, many Brits may be faced with IHT, as it is not uncommon for the value of the family home to exceed £325,000.
Under what circumstances is tax not applicable
Some assets can be arranged to avoid Inheritance Tax liability. There are tax benefits in Pension Plans or Life Assurance Policies. These could be plans that you could have taken out yourself, or they could be provided by your employer.
Such plans are normally set up so that your heirs can benefit outside of the terms of your Will. For pension plans it is fairly straightforward, the payments will either stop upon your death or the amount will go down with a certain amount going to your surviving spouse.
Some complexities arise if you were to die before retiring however. You may be entitled to a lump sum payment as a ‘death in service’ benefit. It is up to the discretion of the trustees of the pension fund how and to whom the payment is to be directed, you can however record your wishes for them to take under consideration. As long as you follow the instructions, there should be no reason for you to pay any IHT tax on these benefits.
Another benefit worth considering is the Life Assurance Policy. These can be written in trust and could be an easy and cost effective method of arranging the funds to pay Inheritance Tax upon your death. As with all serious financial decisions, it is a good idea to consult with a solicitor or accountant to make sure that these methods are right for you.
Other ways of reducing tax liabilities
Some describe Inheritance Tax as a voluntary tax due to the fact that, you have the ability to take the necessary arrangements in order to at least minimise the amount of tax applicable on your estate.
As an example, one could arrange and move assets so that they would fall under the nil-rate band upon your death. There is also an aspects of IHT, which is called a Potentially Exempt Transfer (PET). This means that even if you are extremely wealthy – you could give everything away and as long as you survive for 7 years afterwards and provided your final value is under the nil-rate band, then there will be no inheritance tax to pay.
One of the biggest tax exemptions apply to assets that are transferred between spouses. If a husband was to leave all of his assets to his wife, there will be no IHT payable on death. However, the surviving spouse will be charged on her total worth upon her own death. It is worth taking into consideration all of these factors early on and finding the best way to take advantage of the nil-rate band and transfers to spouses.
Best place for keeping a Will
Make sure to keep your Will in a safe place and remember to let someone know that you have a Will and where they can find it should you die. It would be prudent for your named executors to have a copy of the Will, as well as a copy for your own records. The main consideration is to keep the Will updated after any major life changes, as well as your own changing wealth and wishes.