At Charter Tax, we are often asked about Inheritance Tax as, with expert planning, it is a tax which can be avoided or mitigated – which is why it’s sometimes referred to as a ‘voluntary tax’. It is a tax levied on a person's estate when they die and on certain gifts made during an individual's lifetime.
Modern Inheritance Tax dates back to 1894 when the government introduced estate duty, a tax on the capital value of land, in a bid to raise money to pay off a £4 million government deficit. It replaced several different inheritance taxes, including the 1796 tax on estates introduced to help fund the war against Napoleon.
The earliest death duty can be traced back to 1694. At the time, probate duty was a tax on personal property from Wills. Its name comes from the Latin ‘probare’ (to prove), because the Wills had to be proved in court before they could be taxed.
Death duties were renamed as the capital transfer tax in 1975, and since 1986 they have been known as Inheritance Tax. Changes to Inheritance Tax laws, including the minimum threshold for an estate and how exemptions work, were introduced in 2007 and 2017.
In simple terms, Inheritance Tax is a 40% tax applied after a person dies to estates that are worth over £325,000 –subject to certain restrictions an additional allowance of up to £175,000 is available if a home or the sale proceeds of a home are included. It can also apply to certain gifts made during an individual’s lifetime. Gifts between UK-domiciled spouses during their lifetime or on death are exempt from inheritance tax, as well as most gifts made more than seven years before death.
The value of your estate for the purpose of Inheritance Tax includes:
- Land and buildings.
- Investments.
- Your savings.
- Possessions including cars, jewellery, furniture etc.
- Certain payments from payment funds may be subject to Inheritance Tax.
- Subject to certain exemptions, the value of any money or property you gave away during the seven years prior to death
The first £325,000 of your estate is tax-free, so the 40% tax only applies to anything that goes over this value.
What's exempt from Inheritance Tax?
- Assets that qualify for Business or Agricultural Relief
- If you leave your whole estate to your husband, wife or civil partner then no Inheritance Tax will be payable.
- If a husband, wife or civil partner doesn't use all of their £325,000 tax-free limit, then any unused part can be passed on to their surviving partner.
- You don't need to pay Inheritance Tax on anything you leave to charity.
- Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts to individuals and some wedding or civil partnership gifts. However, gifts made while you are alive could be liable for Inheritance Tax, depending how much they were and when they were given.
At Charter Tax, not only can we help the family understand the tax issues involved in passing the wealth down the generations, and the best tax structuring mechanisms available to do that, we work with the family to sit down together and make sure that everyone appreciates the family goals, so the family remains cohesive into the future.
If you’ve got any questions about Inheritance Tax planning, call us on tel: 01580 313108.
