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Inheritance Tax

By: Garry Crystal - Updated: 14 Jun 2010 | comments*Discuss
Inheritance Tax

Inheritance tax was once seen as a tax on the rich but with earnings and property prices constantly rising in some parts of the country this tax now covers a wider spectrum of people. At a taxation rate of 40% it does seem to be one of the highest taxations, and it does seem a little unfair that 40% of your assets will go to the state after your death. There are exemptions that can be brought in to avoid losing a large part of the inheritance you are intending to leave behind.

The Inheritance Tax

The law at present states that 40% of everything you own at the time of your death can be taxed, but only if the value of your estate is above the £300,000 nil band rate. This may seem like a great deal of money but bear in mind property prices in some parts of the country; for many it’s less than the price of an average two bedroom house.

Your taxable assets will include your possessions, property, and your savings and investments. Inheritance tax will also take into account assets that you have given away during your lifetime and jointly owned assets. If you have transferred your assets into companies and trusts and the value is over the nil tax band rate then you will still have to pay inheritance tax, although there may be some exemptions.

Exemptions to Inheritance Tax

Exemptions are regulations laid down that mean you will not have to pay the tax if you fit the criteria. There are numerous exemptions and rules within the inheritance tax and it will be in your best interest to fully research this tax and gauge if you qualify for an exemption.

Common Exemption Rules

  • On your death, if your estate is passed to your wife, husband or civil partner and both are permanently living in this country (UK), then you will not have to pay the tax, even if the value is over the £300,000.

  • Gifts that you have given during your lifetime are exempt, as long as it is more than seven years before your death. You can give away £3,000 each tax year without having to pay the tax. You can carry this £3000 gift to the next year meaning you can gift £6,000 but you cannot carry it farther than that. Most gifts made seven years before your death are exempt from any inheritance tax.

  • You can give away gifts to certain people, known as beneficiaries and not have to pay any inheritance tax. As long as you both live permanently in the UK this can include your husband, wife and civil partner even if you are separated, but this does not apply if you are divorced or if the partnership has dissolved. You can also give to UK charities, political parties and some national institutions.

Property Exemptions

One of your largest assets will be the home that you live in and whether or not this will be exempt will be dependant on whom you leave it to, or who it automatically goes to. If you and your partner, wife or husband owns the home as joint tenants then all of the property will revert to your partner or spouse. If you are tenants in common then each of you will own a portion of the property and this can be passed on to whoever you want.

If you are planning to gift this property to your children, then this should be undertaken more than seven years before your death, if not the property will not be exempt from inheritance tax.

Potentially Exempt Transfers (PET)

Life-time gifts that are not exempt from tax are known as potentially exempt transfers. You will not have to pay tax on these gifts as long as you live for more than seven years after you have made the gift. If you die within seven years of the giving the gift then inheritance tax can be asked for but only if the total of the gifts is over the nil tax band rate.

Planning your Inheritance

Planning your inheritance finances well in advance will ensure that you leave your money and assets to who you wish and may avoid a large chunk of it heading to the taxman. Making your will is the first step towards providing for those who are left behind, if you do not make a will then your estate could be divided up among people you did not intend it to go to. You will find information on every exemption from inheritance tax on the UK government website.

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