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An Introduction
Inheritance Tax (IHT) is probably the tax
that people get the most annoyed about and seek to avoid paying if at all possible. IHT is payable by the beneficiaries of your estate
at a flat rate of 40% on assets above a threshold of £300,000 if you are an individual or,
following the Chancellor's announcement in his pre-Budget report last October, £600,000 for married
couples and those in civil partnerships. The £600,000 allowance assumes that on death, the surviving partner
inherits all of the deceased partners unused allowance. It is potentially payable on all
transfers of value, not only on death.
However, it is important to try to understand the tax and how and why it works like it
does as well as considering some of the planning opportunities that are available to us. It
is important to understand that in a document of this type, it is only really possible
to take a cursory look at this complicated tax. Prior to undertaking any planning,
specialist advice should be obtained.
In this document, we will also consider Trusts and their uses. This is because trusts
are inextricably linked to the mitigation of IHT.
How We Got To Where We Are
In 1894 transfers
of capital on death became subject to a tax charge for the first time with the
introduction of Estate Duty. The Finance
Act 1975 extended the regime of tax on transfers of capital to lifetime gifts
with the introduction of Capital Transfer Tax with effect from 26 March 1974.
Inheritance Tax
(IHT) was introduced by the Finance Act 1986 to replace Capital Transfer Tax
and applies to all transfers made on or after 18 March 1986. The legislation is now mainly found in the
Inheritance Tax Act (IHTA) 1984. Section 156 and Schedule 20 Finance Act 2006
introduced new IHT rules for assets held in trust.
Inheritance tax
applies to “transfers of value” (therefore it does not apply if an asset is
sold, so long as it is at the full market value) whether made during lifetime
or on death. These are transfers that
reduce the value of the transferor’s (the person making the transfer) estate.
Tax is charged, usually on the transferor, by measuring the loss to the
transferor’s estate, rather than by reference to the benefit received by the
transferee.
IHT is a
cumulative tax. A chargeable transfer
remains in the transferor’s accumulation for seven years. After seven years the transfer is no longer
taxable, but may continue to be relevant in certain circumstances.
Hopefully, these will give you a firm grounding on this issue, whether you require urgent help, or simply wish to know more about this particular form of taxation.
Simply follow the links above for detailed information.
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