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Estate Planning

When planning how your estate should pass to your relatives and others whether during your life or on your death, Berry Redmond Gordon & Penney can help ensure that you minimise your liability to inheritance tax (IHT) and pave the ways in which the liability can be minimised.

IHT is charged on certain transfers of money and property made by a person during his lifetime and on the value of his estate at the date of his death.

Any person who is domiciled in the U.K. is subject to the tax on all property owned by him in the U.K. or overseas. A person of foreign domicile is subject to the tax only on property which is situate in the U.K. (Domicile for these purposes has a special meaning).

Inheritance Tax is levied by the Government on your estate when you die. Essentially, it is a very simple tax being a charge of 40% on the net value of everything that you own above a designated threshold which is called the Nil Rate Band (referred to as the NRB).

The IHT Nil Rate Band is currently £325,000.

Additions to the estate

In calculating the IHT payable on a deceased person’s estate the following are added to the value of it:

  • the value of outright gifts made by the deceased during 7 years prior to his death(except where wholly or partially exempt)
  • the value of property which the deceased has given away prior to his death but has retained an interest (e.g. if a person gives his house to his children but carries on living there then for IHT purposes the whole value of the house at the date of his death will be added to his estate to calculate the IHT payable).

Exclusions from the estate

In calculating the IHT payable the following are excluded:

  • lifetime gifts up to a total of £3,000 in each tax year
  • lifetime gifts up to £250 to different individuals or bodies in any one tax year
  • lifetime gifts up to certain specified amounts made by a person to the bride or groom in consideration of their marriage
  • lifetime gifts from a person’s income (these gifts must be normal and it is necessary to show that after making them the person has sufficient income to maintain his normal standard of living)
  • outright transfers and gifts made more than 7 years ago provided the deceased did not reserve any benefit to himself or continue to use the asset after the transfer was made
  • the value of outright gifts and transfers made between husband and wife and between civil partners whether during their lives or on death
  • the value of outright gifts and transfers made to charities, certain political parties and national bodies.

Relief for business and agricultural transfers

In assessing the value on which IHT is calculated special provisions apply to business property, agricultural farmland and woodland as follows:

  • the value of business property may qualify for 100% or 50% deduction in certain circumstances (e.g. a 100% deduction applies to a sole proprietors business; a 50% deduction is available for an asset owned by a partner and used by his firm - the business of dealing in stocks, shares, land or buildings does not qualify)
  • the value of agricultural farmland may qualify for 100% or 50% deduction in certain circumstances (e.g. 100% deduction is available where the deceased person occupied the farmland for the purpose of agriculture for a period of 2 years prior to his death; a 50% deduction is available for farmland let on a tenancy granted before the 1 September 1995 where vacant possession is not available within 12 months). Land used for grazing by horses does not qualify as the use is not considered to be agricultural (unless it is a stud farm).

Married couples and civil partners

Special rules apply on the death of married couples and civil partners. On the death of the first spouse or civil partner the nil rate band applicable to his or her estate, or part of it, may not be used if, for example:

  • the whole or part of the estate is given to the survivor and is therefore exempt from IHT,
    or
  • the value of the estate after allowing for relief and deducting exempt gifts is less than the nil rate band limit.

In those circumstances when the second spouse or civil partner dies the nil rate band applicable on the second death will be increased by the proportion which was not used on the first death.

For example, if the first spouse or civil partner dies in the current tax year giving the whole of his or her estate to the survivor and no gifts which are not exempt have been made during the 7 years before his death, no part of the nil rate band will have been used and 100% of it will be available on the survivor’s death. If the survivor dies in the current tax year the nil rate band applicable to his or her estate will be from £325,000 to £650,000. Inheritance tax will then be payable at the following rates:

  • on the first £650,000 at nil percent
    and
  • on the balance at 40%.

Caution

Inheritance rules are complex. Lifetime planning can give rise to liability for other taxes such as capital gains tax. The above is only a brief outline. Before taking any steps to try to minimise the IHT payable, professional advice should be sought. Call us now or fill out our enquiry form for more information.

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