Inheritance tax … Is it worth planning for?
If you hold total assets in your estate of over £325,000, including any assets held in trust and gifts made within seven years of death, you will have to pay Inheritance Tax. Nowadays many people are accountable for inheritance tax, especially with the value of property and homes being above this amount.
To give more information and clarity about Inheritance Tax in one easy to read article we have taken the information below from HM & Customers website. See http://www.hmrc.gov.uk/inheritancetax/ for all details on inheritance tax.
What is Inheritance Tax?
Inheritance Tax is usually paid on an estate when somebody dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. Most estates don’t have to pay Inheritance Tax because they’re valued at less than the threshold (£325,000 in 2012-13). The tax is payable at 40 per cent on the amount over this threshold or 36 per cent if the estate qualifies for a reduced rate as a result of a charitable donation.
Increased threshold for married couples and civil partners
Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2012-13. Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.
Tax when you inherit money, assets or property
When someone dies and leaves you money, assets or property, you usually won’t have to pay any Inheritance Tax. This is because Inheritance Tax is generally paid out of the estate before you get your inheritance. However, in certain situations, you might have to pay other taxes.
You might have to pay Income Tax if the items you inherit generate income for you. Examples include:
· interest earned on money
· dividends paid on shares
· rental income from renting out a property
Capital Gains Tax
You might have to pay Capital Gains Tax if you sell, give away or exchange an asset you’ve inherited and it’s gone up in value since the date of death. The legal term for the many ways you can cease to own an asset is ‘dispose of’ assets. (In some cases you may be treated as if you’ve disposed of an asset that you still own – for example, if you receive compensation for a damaged antique.)
If the asset you inherited increases in value between the date of the deceased’s death and the date you dispose of it, the increase is a ‘capital gain’
Inheritance Tax exemptions – what you can give away
Gifts are treated in a number of ways for Inheritance Tax purposes. However, you only need to worry about making gifts if you think your estate – including the value of any gifts you make – might exceed the Inheritance Tax threshold when you die. If your estate is over the threshold, any gifts you make more than seven years before you die will be exempt from Inheritance Tax.
The seven-year rule – ‘potentially exempt transfers’
Any gifts you make to individuals will be exempt from Inheritance Tax as long as you live for seven years after making the gift. These sorts of gifts are known as ‘Potentially Exempt Transfers’ (PETs).
However if you give an asset away at any time, but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a potentially exempt transfer.
If you die within seven years and the total value of gifts you made is less than the Inheritance Tax threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.
However, if you die within seven years of making a gift and the gift is valued at more than the Inheritance Tax threshold, Inheritance Tax will need to be paid on its value, either by the person receiving the gift or by the representatives of the estate.
If you die between three and seven years after making a gift, and the total value of gifts that you made is over the threshold, any Inheritance Tax due on the gift is reduced on a sliding scale. This is known as ‘Taper Relief’.
How Inheritance Tax or other debts may affect inherited property
If you inherit a property from your spouse or civil partner, you’re an ‘exempt beneficiary’ and you normally won’t owe Inheritance Tax as long as you’re domiciled in the UK.
If you owned property jointly as ‘joint tenants’ with the deceased and you weren’t their spouse or civil partner, you’ll have to pay any Inheritance Tax due on the property when you inherit it.
If you owned property jointly as ‘tenants in common’ with the deceased and weren’t their spouse or civil partner, but inherited their share under the will, the deceased’s executor or personal representative must pay any Inheritance Tax or debts before distributing the estate among the beneficiaries.
They’ll usually try to do this using funds from other parts of the estate. However, if there’s a shortfall, you as the remaining owner are responsible for that shortfall and HM Revenue & Customs (HMRC) and other creditors have the right to approach you.
If there isn’t enough money in the rest of the estate to pay the outstanding tax or other debts, you may need to sell the property.
Capital Gains Tax when selling or ‘disposing of’ a property
If you inherit and dispose of a property you live in
If the inherited asset is a property that you live in as your main home from the time you inherit it to the time you sell or dispose of it, you may not have to pay Capital Gains Tax when you dispose of it. This is because any gain you make when you dispose of your main home may be free of Capital Gains Tax through ‘Private Residence Relief’, whereas a gain on any other home may not be.
If you inherit and dispose of a second property
You can only have relief from Capital Gains Tax for one property at a time, so if you inherit a second property and live in it as a home, you should nominate one of your homes as your main home. You should do this within two years of making one of them your main home and let HMRC know.
If you don’t nominate one of your homes as your main home and later sell or dispose of one of the properties, the decision as to which home was your main home will be made on the facts. You may have to pay Capital Gains Tax if the home deemed not to be your main home has increased in value.
Giving your home away and continuing to live in it
You can continue to live in your home as your primary residence after giving it away, provided you pay a market rent to the new owner. Bear in mind that the new owner may have to pay Income Tax on the rent you pay them.
If you don’t pay a market rent, the gift will be considered a ‘gift with reservation of benefit’ and the house may be subject to Inheritance Tax.
Selling your home and giving the money to your children
If you sell your home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for seven years after you make the gift.
However, if you sell your home, give the money to your children and then move into their home – whether this is into a granny annex they’ve made for you with the money or a room in a house they have purchased – there could be Income Tax implications. You may be classed as living in a pre-owned asset if you don’t pay the market rent.
If both you and your children sell your homes, pool your money and buy a new home as joint owners to live in together, the part belonging to you will be considered part of your estate for Inheritance Tax purposes.
If you don’t make equal contributions to the purchase, or don’t occupy the same share of the property as you purchased, you may have to pay Income Tax as your share may be classed as a pre-owned asset.
If you give your home to your children and they move in with you
If you give your home to your children and they move in with you, the gift will be treated as a ‘gift with reservation of benefit’ and the home will still be subject to Inheritance Tax.
However, if you give half of your home to your children, they move in with you and you share bills jointly, the half that you give them won’t be treated as part of your estate for Inheritance Tax purposes as long as you live for seven years after making the gift.
So that was simple! What experience have you had with Inheritance Tax?