Inheritance tax explained by Interactive Investor expert
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Inheritance can be a tricky financial topic to handle, with many pitfalls to avoid as Britons look to reduce their bill. Tim Latham, a chartered financial planner at Equilibrium Financial Planning, answered some of the most commonly asked questions regarding inheritance tax.
When is inheritance tax paid?
Mr Latham said: “The timing of when IHT is payable is dependent on the setup of one’s affairs and their will.
“In most cases, for married couples whose wills are set up so that they receive their late partner’s assets on first death and then the overall estate passes to direct descendants on second death, any IHT payable is typically due on second death.
“When a person dies, they will have appointed executors of their estate. These people are responsible for valuing the estate left behind and reporting this to the HMRC, a process known as probate.”
He also explained that they must then pay the necessary IHT within six months of the death before probate is granted. IHT can be paid from funds within the estate, or from money raised from the sale of the assets.
Mr Latham continued: “The latter is more difficult if one’s estate is made up entirely of property for example, and there are timing issues with property sales.
“There are typically three options for paying IHT and they include the Direct Payment Scheme, paying in instalments or applying for an Executor’s loan. All should be discussed with guidance of an expert to help through the process.”
What IHT allowances are there for gifting?
Mr Latham explained that certain gifts can be made without incurring an IHT liability.
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- Gifts between spouse or partner
- An annual gift allowance of up to £3,000
- Small gifts of up to £250 per recipient
- Direct gifts of any amount to charity
- Regular gifts out of surplus income
- Gifts made in consideration of marriage, with differing thresholds depending on the relation.
He added: “Any gifts other and/or more than these available allowances could be subject to seven-year gifting rules.”
What is the seven-year rule?
Mr Latham explained: “Gifts made directly to individuals are classed as potentially exempt transfers (PET).
“Although there is no limit on the value of these gifts, the individual making the gift must survive seven years from the date of the gift, before the value is deemed ‘outside of the estate’ for IHT purposes.
“Any gifts made into trust, such as a discretionary trust, is classed as a chargeable lifetime transfer (CLT).”
In contrast to PET’s, CLT’s will be subject to an immediate charge to IHT at 20 percent where the value of the gift exceeds the nil-rate band of £325,000. Residence nil-rate band is not considered.
He continued: “If the donor survives for seven years from the date of gift there will be no further IHT payable but there is no refund of any IHT paid at outset.
“It’s important to plan ahead and work with a trusted financial planner in order to reduce the chance of a large IHT bill for loved ones.
“Whilst IHT planning takes care of the logistics and prepares money to be passed on, it’s beneficial to do intergenerational planning alongside this to decide when beneficiaries will receive the money, and why.”
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