Inheritance Tax (IHT) is levied on your Estate and assets totalling over £325,000 in value upon your death. The rate is 0% on the first £325,000 of a person’s assets, and 40% thereafter.
There are various ways to reduce your IHT bill. The following are the most common examples of deductions available:
If the person has owned them for a minimum period of two years, some business assets qualify for inheritance tax relief. According to HMRC, the types of assets that qualify for business relief include:
- an interest in a business, such as a partner in a partnership
- unquoted shares which are not listed on a recognised stock exchange
- shares or securities which give the transferor control of a business
- land, buildings, plant or machinery used wholly or mainly in the business or partnership
Gift deductions range from: ‘Small gifts to individuals’ (up to £250) to ‘Gifts in consideration of marriage or civil partnership’ (defined as a gift made to a person who is about to get married or form a civil partnership, maximum £5000). An annual amount of up to £3000 that can be in numerous gifts is also deductable; but cannot be used in conjunction with the ‘small gifts’ allowance.
Outright gifts to an individual (for example giving ownership of your house to a sibling) are known as ‘potentially exempt transfers’. These gifts have the potential to become tax free if they are given seven or more years prior to death. There are varying tax bands if death occurs between three to seven years of the gift.
A Trust is a financial vehicle that enables a person to give, or entrust, their assets into a fund that is no longer considered part of their estate, and is therefore not taxable.
Trusts are a major part of Estate Planning; there are many things to consider and you should seek professional advice. For a more detailed look at offshore trusts and estate planning please view our Offshore Estate Planning section.
Other deductions include some farmland, some political donations and all assets left to a UK-registered charity or charities.
The key here is ‘Domicile’. This is different to residency, and is defined by HMRC as ‘where a person has their fixed and permanent home and to which, when they are absent, they always have the intention of returning.’
Be aware, the rules on this are very different to income tax and residency laws; HMRC domicility is generally defined as whether you have been resident in the UK for 17 of the last 20 years, or the previous three tax years. This is a complex area of tax law which can be confused when the revenue services of both your country of residence and the UK both claim jurisdiction over your estate.
Inheritance Tax is very complex and many details must be considered. Please see our sections on Offshore Retirement Planning and Offshore Wealth Management for further information. We can also advise you on how to contact a professional adviser for bespoke help.