RegulationJun 25 2015

IHT: A cut above the rest

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      IHT: A cut above the rest

      The issue of IHT has been long debated, especially in the past few months among political parties contesting elections. But the future of inheritance tax will be clearer only after the new government has settled in.

      Broadly, IHT is paid if a person’s estate, including their property, money and possessions, is worth more than £325,000 when they die. The rate of tax is 40 per cent on anything above this threshold. Although it may be reduced to 36 per cent if 10 per cent or more of the estate is left to charity.

      So, for example, if you leave behind assets worth £500,000, your estate pays nothing on the first £325,000, and 40 per cent on the remaining £175,000 – a total of £70,000 in tax – if you’re not leaving anything to charity. The limit of £325,000 has officially been frozen until 2017/18 tax year but the new government may look at changing this. Table 1 shows HMRC’s IHT threshold from March 1986 to the present day.

      “The general inheritance tax rules themselves are quite straightforward and easy to understand,” says Patrick Connolly, a financial planner at Chase de Vere. “There are standard principles, standard exemptions and also standard gifts which are permitted.”

      The IHT is usually paid by the executor of the will or the administrator of the estate using funds from the estate. The HMRC website defines an executor as a person named in the will to deal with the estate – there can be more than one. It defines administrator as the person who deals with the estate if there is no will.

      The main situations in which IHT is paid include when assets are transferred into a trust and the 10-year anniversary of when it was set up, when assets are transferred out of a trust or when the trust ends and when someone dies and a trust is involved when sorting out their estate.

      “The complication with inheritance tax comes when people try to find ways to avoid paying it. This is where they really need legal and/or financial advice to consider, for example, ownership and structure of assets and trust arrangement,” says Mr Connolly.

      Exemptions & reliefs

      IHT reliefs allow some assets to be legally passed on free of tax or with a reduced bill. The executor of a will or administrator of an estate should claim the reliefs when they are working out how much the estate is worth.

      As covered in Money Management’s September 2014 and February 2015 issue, people in certain ‘risky’ roles are exempt from paying IHT if they die in active service. Included in this are armed forces personnel, police, firefighters and paramedics, plus humanitarian aid workers.

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