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Inheritance Tax Firstly, some basic rules about Inheritance Tax and how to avoid it The nil rate band 1. Apart from exemption for bequests to your surviving spouse or to charity, estate on your death exceeding the nil rate band (currently £325,000) is taxed at 40%.Capital you give away in the seven years before your death is included when calculating your estate, though there is taper relief on gifts made over three years before your death.
2. Married couples have the chance to add their bands together so that, for example, the first to die bequeathed, say, £100,000 to the next generation. The survivor's nil rate band would then be the total for both spouses,less the £100,000 already used.
3. Some time ago the Conservatives promised, if they are elected in the next General Election, to increase the nil rate band to £1 million per person, also transferable from one spouse to the other. Due to the current state of government finances, this may not happen for some time. Even if it does, there is a consensus developing in favour of giving tax powers to the Scottish Parliament, which may well not follow Westminster.
The potentially exempt transfer 4. If you give away assets during your lifetime, and survive 7 years, the gift is not taxed. Other exemptions 5. There are certain exemptions: without incurring Inheritance Tax you can
Agricultural and business property relief 6. Agricultural and business assets, if actively managed,are exempt after being held for two years. Tenanted farmland attracts 50% relief. Land or property-holding companies do not qualify unless they are active in construction or land development. There are schemes under which a taxpayer's limited company can join a partnership in housing, public houses, or forestry, with the management provided. Shares in such a company can qualify for 100% business relief from Inheritance Tax. Companies which only hold investments will not normally qualify.Shares in the Alternative Investment Market (AIM) qualify for Business Property Relief and are becoming popular, but again you must have held them (or substitutes for the original AIM holdings) for at least two years.Further information is available on request. Retaining some benefit from a gift will not work 7. If you give away an asset but retain the right to use it, either exclusively or on a shared basis, the gift may not be effective for tax purposes and the asset might still be counted as part of your estate on your death. Alternatively, you may find you are being taxed on the benefit you get from it. 8. You can effectively give away your home so long as the new owners, e.g. children, live in it (with or without you) or, if not, you pay them a market rent. How trusts can be used to limit Inheritance Tax |
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