Inheritance tax (IHT) has, over the past decade, become a major political issue. What was once seen as a tax that was only of concern to the seriously rich now touches more and more families each year. As a result, an increasing range of schemes are being marketed to help mitigate this burden, taking advantage of a number of tax reliefs that, when used properly, can considerably reduce the exposure of an estate to IHT.
The starting point with IHT planning is the threshold at which it starts to bite into an estate. When you die, your whole estate is, in theory, subject to IHT. Displaying typically bureaucratic logic, the amount below the current IHT threshold is known as the ‘nil rate band’, which means the level of the tax is zero. Anything above this level – £300,000 for the current tax year, rising to £312,000 in 2008/09 – is subject to tax at
40 per cent.
Thresholds rising slowly
Chancellor Alistair Darling’s much publicised – and subsequently much derided – proposal in his Pre-Budget Report to allow married couples a joint £600,000 IHT threshold (rising to £700,000 by 2010) simply reflected a situation that actually already existed. Each individual has their own IHT threshold, transfers on death between spouses are not currently subject to IHT and, in his final Budget in March 2007, Gordon Brown had already set out a series of annual increases in the threshold.
It remains to be seen whether the details of his proposal will remain unaltered when Darling finally gets to deliver the real thing in a few weeks’ time, but the intention appears to be to create a form of ‘married couple’s IHT allowance’, which enables them to pass the full value of both their thresholds to their heirs should they die at different times. One of the problems with the current situation is that, if one spouse leaves a significant amount of their estate to their partner, the surviving spouse will only have their own exemption to protect the combined estate from tax when they die.
Other allowances
However, it is important to realise that, even before you approach the IHT threshold, there are many other allowances that can reduce the value of an estate for IHT purposes. Most of these involve giving money to someone else. In addition to the exemption for gifts between husbands and wives, there is no IHT on gifts in relation to marriage (up to certain limits). Gifts to charities attract a similar exemption, and there is a further annual exemption limit of £3,000 on more general gifts (see the box opposite).
Then there are the potentially exempt transfer (PET) rules. These allow larger gifts to be made out of the estate. As long as these gifts are genuinely ‘lifetime transfers’ to third parties, they will ultimately fall outside your estate for IHT purposes. The reason they are referred to as ‘potentially exempt’ is that the donor has to survive for seven years from the date of the gift for it to be fully exempt from IHT.
Copyright Vitesse Media
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