The formation of a will which enables you to minimise your tax liability is of the utmost importance. It is likely, if you are well off that you will want to consult a solicitor or financial advisor in order to get appropriate advice. It could be that you own a house which over the years has appreciated considerably which has resulted in the property being worth a considerable amount. This may mean that you could be liable for inheritance tax.
It is prudent to ensure that your will is updated regularly in order to keep abreast of the changing tax laws. The more wealthier you become, the more important this becomes.
Deed of variation
Any change to a legal document is, in the main, achieved through a deed of variation. Within two years of death, a beneficiary if a will may alter that deed in writing. For the purposes of inheritance tax the changed will is regarded as having been made by the dead person and substituted for that provision in the will or under the rules of intestacy. Tax will only be payable under the new provision. This is still true even if the beneficiary received the property and makes a gift of it or disclaims a legacy within two years of the death. The law governing this is set out in section 142 Inheritance Tax Act 1984. In order to comply with s. 142 the disclaimer must be in writing, refer to the provision in the will and be signed by the person making the change.
The deed should be sent as soon as possible to the HM Revenue & Customs. Where a person redirects property or makes a gift of it within the two-year period he/she must give written notice to the HM Revenue & Customs within six months of doing it that he warns of this provision to apply. If the effect is to increase the liability to inheritance tax, then the executors must join in the notice and can refuse on the ground that they do not have sufficient assets in the estate to pay the extra tax.
Inheritance tax was introduced under the 1986 Finance Act to replace Capital Transfer Tax. It is a tax on what is known as “transfer of value” meaning transfer under the terms of a will, or the rules of intestacy which reduce an estate.
The amount which is liable to tax is the amount less any exemptions. For tax purposes, the amount of the estate is the valuation of the estate of the dead person immediately before death. The tax is levied on transfers made by the dead person on death or within seven years of death.
Amount of inheritance tax payable
This is dependant on three factors:
The value of the estate
The value of any substantial gifts made within the last seven years
Any exemptions from inheritance tax on ones death such as those on gifts to a surviving spouse, charities etc.
If a person is resident (domiciled) in the United Kingdom the tax applied to all that person’s property wherever it may be situated at home or abroad. If a person is domiciled abroad then the tax is applicable only to property in the UK
The threshold for inheritance tax is 40% on the estate after exempt transfers and after the current tax threshold of £312,000 (2008/09) (check current provisions with your tax office). The amount is increased (usually) each year from 6th of April in line with the increase in the Retail Price Index for the year to the previous December.
Exemptions from tax
The following are exempt for the purposes of inheritance tax liability:
All gifts between the dead person and the spouse. If the dead person is domiciled in the United Kingdom, and the husband/wife is not then the exemption is £55,000.
Lifetime gifts which represent normal expenditure out of the dead persons income during their life. Where payments are made by the dead person which did not change the dead persons standard of living then such amounts if paid seven years prior to the death will not be included in the estate.
Lifetime gifts not exceeding £3000 in any one tax year. A person can make gifts totalling not more than £3000 in any year irrespective of the number of people to whom the amounts over this will be included in the value of the estate if the person dies within seven years.
Gifts in any one tax year to a maximum of £250 per person. There is no limit on the number of people to whom such gifts can be given so long as each one does not exceed £250 in any one tax year. These amounts are additional to the £3000 mentioned above but only to the extent that the total to any one individual in any tax year does not exceed £250.
Gifts in consideration of marriage. Wedding gifts by a parent to his or her child are exempt by up to £5000, by a grandparent or other more distant relative up to £2500 and by other people up to £1000. This applies to each parent or grandparent.
Lifetime gifts for the maintenance of a spouse or former spouse, children and dependant relatives. In respect of a child, the exemption is to the age of 18 or completion of full time education if late. This is available to stepchildren and adopted children, plus illegitimate children. The child must be of the donor or his or her spouse.
All gifts to charities.
Gifts to political parties unless they are made within the year of the date of the death, in which case up to £100,000 is exempt, but any amount above that will be included in the value of the estate.
Gifts to organisations which deal with preservation of the national heritage or of a public nature such as the British Museum. This category includes gifts to most museums and galleries.
Certain types of properties are exempt, including agricultural land, business property, historic houses and woodlands plus works of art.
The use of the nil rate band
The amount of IHT payable on the death of the second spouse/civil partner can be significantly reduced if both spouses make wills that provide for an equal amount of their respective nil rate bands to pass to beneficiaries other than the surviving spouse/civil partner. There have been further changes, announced by the Chancellor of the Exchequer, that from the 9th of October 2007 it is possible for spouses and civil partners to transfer their nil-rate band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual’s surviving spouse or civil partner for use on their death. For more information on this you should refer to the HM Revenue and Customs website.