Inheritance Tax Flashcards
What is inheritance tax paid on?
Charged on the value of the deceased’s estate if it is large enough (assets minus any liabilities) and also in regard to some lifetime gifts made within the 7 years prior to death
When will you not pay any inheritance tax?
1) Value of estate is below £325,000; or
2) You leave everything over £325,000 to your spouse, charity or community amateur sports club
What percentage do you pay and on what?
1) Your estate is taxed at 40% on everything above £325,000
2) Estate can pay IHT at a reduce rate (36%) if they leave 10% or more of the net value (estate’s total value minus any debts) to charity
What about your home?
1) If you leave your home to your direct descendants (children and grandchildren) then you will be charged less, as long as it is worth less than 2 mill and isn’t in a trust. You will receive a £175,000 residence nil rate band in addition to the £325,000 allowance (upping it to £500,000)
2) No IHT is payable if you leave your house to your husband, wife or civil partner
3) If you leave your home to anyone else in your will then it counts towards the value of the estate - unless it’s held as joint tenants
What if you leave your estate to your spouse?
Assets are exempt from IHT as long as the spouse lives in the UK.
What if you’re predeceased spouse didn’t use all of their threshold?
The unused amount will pass over to you
Reliefs and exemptions - Business relief - Unlisted company
Don’t pay IHT on:
1) any business or interest in a business; or
2) shares in an unlisted company.
MUST BE OWNED FOR AT LEAST 2 YEARS
Reliefs and exemptions - Business relief - Listed company
50% business relief on:
1) Shares controlling more than 50% of the voting rights in a listed company
2) Land, buildings or machinery owned by the deceased and used in a business they were a partner in or controlled or held in a trust they have the right to benefit from
MUST OWN THEM FOR AT LEAST 2 YEARS AND HAVE VOTING RIGHTS
Reliefs and exemptions - Agricultural Relief
Can pass on some agricultural property free from IHT if it is land or pasture that is used to grow crops or rear animals.
Reliefs and exemptions - Agricultural Relief - Property which doesn’t apply
1) Farm equipment and machinery
2) Derelict buildings
3) Harvested crops
4) Livestock
5) Property subject to a binding contract for sale
Gifts before you die - General rule
Money given away before you die is still counted as part of your estate unless you live for a further 7 years or more after making the gift.
Gifts before you die - Gifts which are exempt from IHT
You pay no IHT on gifts:
1) Between spouses or civil partners
2) You give to charities and political parties
Gifts before you die - Annual allowance
You can give £3000 away each tax year IHT free. If you don’t give it away one year you can carry it forward for one tax year more.
Gifts before you die - Gifts to everyone you know
You can give £250 each year to everyone you know free from IHT as long as you have no used another allowance on the same person
Gifts before you die - Gifts from your income
You can give away money from income without having to pay tax (as long as it doesn’t affect your lifestyle). Income = pensions and earnings.
Gifts before you die - Wedding gifts
You can give a tax free gift to someone who is getting married:
1) £5,000 to a child
2) £2,500 to a grandchild
3) £1,000 to anyone else.
Gifts before you die - Helping a child through uni
You can help fund your child going to uni, free from IHT.
Gifts before you die - The 7 year rule
No tax is due on any gifts you give if you live for 7 years after giving them - unless the gift is part of a trust.
Gifts before you die - Dying within 7 years of giving a gift
If there’s IHT to pay on it (if total value of gifts is over £325,000 threshold) then the amount of tax due will depend on when you gave it:
1) Gifts given in 3 years before death = 40%
2) Gifts given in 3-4 years before death = 32%
3) Gifts given in 4-5 years before death = 24%
4) Gifts given in 5-6 years before death = 16%
5) Gifts given in 6-7 years before death = 8%
Who pays IHT on gifts?
Any IHT 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 IHT
Gifts Example
Sally died 2022. She was not married. She gave 3 gifts in the 9 years before her death:
1) £50,000 to her brother 9 years before
2) £325,000 to her sister 4 years and 2 months before
3) £100,000 to her friend 3 years before
There is no IHT to pay on the 50k because it is 9 years before.
There is also no IHT to pay on the 325k as it is within the threshold.
Her friend must pay IHT at a rate of 32% as it’s above 325k threshold.
What must you pay IHT on before getting the grant?
- chattels
- bank account
- small holdings of shares in quoted company
