Inheritance tax is, rather glumly, the tax on death or, more accurately, tax levied on the assets you leave behind, known collectively as your “death estate”. Since this includes your main home, many people who fail to do much in the way of estate planning end up contributing a handy £1.5bn to the UK Treasury. So how does it work and can you avoid it?
First off, anyone for whom Britain is a “permanent legal home” is liable as a “UK domicile”, irrespective of where they die. The rules that define this are complex; but in essence, if you were either born here or have spent most of your life here, you are likely to be taxed – not just on the value of your UK assets, but on everything you own globally. The tax itself is pretty brutal: everything in your death estate above the tax-free threshold – currently £312,000 – is taxed at a single rate of 40%, with the cheque due at your tax office (HMCE) from your executor (the person appointed to execute the terms of your will) within six months of the end of the month of death. So, for example, a death estate valued at £500,000 would attract inheritance tax of £75,200 (£500,000 – £312,000 = £188,000 and £188,000 x 0.4 = £75,200).
Fortunately, there are a number of ways to reduce, or even negate, this tax – some simple and some more complex. Couples can combine their allowances – one partner can simply leave both his assets and his allowance to his partner. Then there’s the gifts (“potentially exempt transfers”) rule that says that you can give away any asset, say, to your children, so that it will be excluded from your death estate, provided the gift is made more than seven years before you die. So, as with most tax matters, the earlier you start planning the better. Finally, you can give away as much as you like out of your income (not capital), as long gifts are regular and have no effect on your own lifestyle. See www.direct.gov.uk for details.