The Meek Shall Inherit...
Let us be grateful that we do not live in the south east of this country, where the price of a “single end”, (I think they are called studio apartments today) is touching the £105,000 mark, and a 3 bedroomed terraced house is around £280,000. Great for a seller, but bad news for a buyer!
The articles this month and next look at Inheritance Tax (IHT) for individuals. As the threshold or “nil rate band” (the amount above which tax is payable) is £250,000, many residents in the south east will have estates where tax is due, simply based on their house value alone. However, I am going to assume that we here in Scotland have other assets that could bring the question of IHT into our thinking. This month I will give an outline of what Inheritance Tax is, who it affects and when it is payable. Next month we will look at ways of mitigating the tax. Inheritance Tax is a very penal tax and no longer simply a tax for the rich. You should always seek professional advice when considering your own affairs. When is Inheritance Tax payable? IHT is payable on the death of an individual, on a gift made during his/her lifetime and on a lifetime transfer of value regarded as a “chargeable transfer”. The value of one’s estate above the “nil rate band” is taxed at 40%. However there are exceptions. There is no tax between husband and wife nor indeed any tax payable on bequeaths to charities. Individuals also have annual allowances, which are non-taxable. The most important annual allowance is the £3,000 per donor. There are others, but please ask your financial adviser. If you do make a gift that is irrevocable during your lifetime, it may be a potentially exempt transfer (PET). These gifts become actually exempt only if the donor survives seven years. If the donor dies within three years of making the gift, the value of the gift is counted in full for IHT purposes. Death in year four to seven means that only part of the value is counted. Who is subject to Inheritance Tax? A UK –domiciled individual is subject to IHT on all property owned by him, whether it is located in the UK or overseas. By contrast, a person of foreign domicile is subject to IHT only on property situated in the UK. When a transfer during one’s lifetime is made, it is not necessarily chargeable. Advice needs to be sought from your financial adviser or solicitor here. What makes up the value of your estate? With the exception of business and agricultural property, everything you own, less any debts are considered to make up the value of your estate. This includes, your home and contents, life assurance policies (not written in trust), possessions, cash, shares and unit trusts. You can see that it is a “catch all” tax. Having now summarised what is liable to IHT, who is liable etc. we need to look at ways of mitigating the tax. This will be looked at next month. Remember, you should seek professional advice from your financial adviser or solicitor if you wish to know more.
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