Introduction to Inheritance Tax (IHT)
Inheritance Tax (IHT) is imposed on the estate of a deceased individual. It was introduced in the 1986 Budget and applies to those domiciled in the UK on their worldwide assets, and to non-domiciled individuals on their UK assets. Significant changes and allowances have been introduced over the years, offering strategies for estate planning and tax minimization.
Understanding IHT
Inheritance Tax is primarily based on the value of a deceased person’s estate. In simple terms, it’s a tax on the property, money, and possessions of someone who has passed away. The current threshold for Inheritance Tax in the UK is £325,000 (as of the 2016-2017 tax year), beyond which a flat rate of 40% is applied to the excess amount.
Key Points:
- Threshold & Rate: £325,000 threshold; 40% tax on excess.
- Domiciled Individuals: Charged on worldwide property.
- Non-Domiciled Individuals: Charged on UK property.
- Spouse/Civil Partner Allowance: Transferable unused threshold; effectively raises to £650,000.
- Main Residence Allowance: Additional allowance from April 2017 for main family home, intending to raise individual threshold to £500,000 by 2020.
- Lifetime Gifts: Certain lifetime gifts are retrospectively taxable if the individual dies within 7 years of the gift, known as Potentially Exempt Transfers (PETs).
Examples of Inheritance Tax
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Domiciled Individual: An individual domiciled in the UK passes away with an estate valued at £500,000. Given the threshold of £325,000, the taxable estate is £175,000. The Inheritance Tax payable would be 40% of £175,000, which equates to £70,000.
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Main Residence Allowance: A domiciled individual passes away owning a house worth £450,000 as their main residence. With the standard threshold and main residence additional allowance, the estate may not pay any Inheritance Tax if under the new proposed limits.
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Non-Domiciled Individual: A non-domiciled individual dies owning property in the UK valued at £400,000. The entire value is subject to Inheritance Tax above the threshold limit.
Frequently Asked Questions (FAQ)
What is the current threshold for Inheritance Tax?
The current threshold (or nil-rate band) for Inheritance Tax is £325,000. Any value above this threshold is subject to a 40% tax.
Are there exemptions to Inheritance Tax?
Yes, gifts between spouses or civil partners are exempt, and certain charitable donations may also qualify for exemptions.
What are Potentially Exempt Transfers (PETs)?
Potentially Exempt Transfers are gifts that become exempt from Inheritance Tax if the person making the gift survives for seven years after the gift is made.
Can the threshold be increased?
The unused part of the £325,000 threshold can be transferred to a surviving spouse or civil partner, potentially doubling the threshold to £650,000.
Is there additional relief for main residences?
Yes, from April 2017, an additional residence nil-rate band applies to main family homes, intending to raise the individual threshold to £500,000 by 2020.
Related Terms
Exempt Transfers:
Transfers of assets that are completely free from Inheritance Tax, such as those between spouses or to charities.
Potentially Exempt Transfers (PETs):
Gifts that are exempt from Inheritance Tax if the giver survives for seven years after making the gift.
Chargeable Transfers:
Transfers of assets that are subject to Inheritance Tax either during a person’s lifetime or upon their death.
Online Resources
Suggested Books for Further Studies
- “Inheritance Tax Simplified” by Lee Hadnum - A comprehensive guide on navigating inheritance tax laws and planning.
- “Tolley’s Inheritance Tax” by Malcolm Gunn - Detailed and authoritative text on IHT laws and practices.
- “Estate Planning for Dummies” by N. Brian Caverly, Esq., and Jordan S. Simon - A practical guide to planning estates with a focus on minimizing IHT impact.
Accounting Basics: “Inheritance Tax (IHT)” Fundamentals Quiz
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