Exceptions of Inheritance Tax

In today's variable financial climate more and more people will be affected by Inheritance Tax. Individuals no longer need to be seen as being wealthy, to have concerns about this tax issue. Even those who consider themselves to be comfortably well off will have reasons to worry about the tax implications.

What is Allowed?

The law states that if your estate is valued below £300,000 you will not have to pay any tax on it. This amount is known as the Nil Rate Band. Once your estate is worth more than £300,000 however, you will be charged 40% Inheritance Tax for the rest of the monetary value.

If your estate is worth £500,000, for instance, it will look like this:

• The Nil Rate Band of the first £300,000 is tax free, but you will be taxed 40% on the £200,000 remainder. Which will result in a total £80,000 Inheritance Tax bill.

Exemptions

There are however, a number of exemptions to this Inheritance Tax rule, and it is worth knowing what these are. If your estate is worth over the Nil Rate Band of £300,000, the following amounts can be deducted before the Inland Revenue examine your Nil Rate Band.

• Gifts of up to the value of £3,000 can be given within each tax year. This allowance can be carried forward one year, if not used up, providing a £6,000 gift total. However, it cannot be carried forward to subsequent years.
• Parents can give a child a £5,000 wedding gift. Each grandparent is allowed a £2,500 gift, and anyone else can give £1,000.
• Gifts of up to £250, can be given per person per year. You are allowed to give this gift to as many people as you wish, which actually means that you could generously give away the whole £300,000 estate value in individual £250 slices, if you so wished, and knew enough people to give these to.
• Any amounts given to charity are tax exempt.
• The same goes for gifts given, or left, to a spouse. Although this is not applicable if your spouse is foreign domiciled.

It is also possible to claim back Inheritance Tax on gifts you may have made in the previous seven years of your lifetime. There is a sliding scale that applies to gifts in this seven years before death period, which starts at 40% up to 3 years before death and ends at just 8% between 6 and 7 years.

Tricks of the Trade

There are a few methods of Inheritance Tax avoidance, which are worth considering. One simple way is to take advantage of two Nil Rate Bands. For instance, if a married couple own an estate worth £600,000 they could, upon death of the first spouse, give £300,00 away to their beneficiaries.

If they choose not to do this and opt to pass the estate to the surviving spouse, when the estate is finally split it will incur 40% Inheritance Tax bill totalling £120,000. This is because only one Nil Rate Band will be considered.

Grandparents can also make use of the £250 gift exception. Rather than pass the money to their children, grandparents can offer up to £250 to each of their grandchildren. Passing money in this way avoids having to pay Inheritance Tax on the amount.

Make sure to clearly define, in your Will, that these instructions must be carried out before Inheritance Tax is considered.