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Inheritance Tax: How one specific rule could affect IHT bill before death
Inheritance Tax currently stands at a rate of 40 percent, and it’s usually not payable on the value of a person’s estate below a set threshold. For most Britons, the threshold currently stands at £325,000, and for any estate which exceeds this value, the proportion above this amount would be taxed. The tax, often described as Britain’s ‘most hated’, is something many families will think about, even before the death of their loved one.
This is because Inheritance Tax could stand to take a chunk out of any estate inherited after someone passes away.
However, one rule, sometimes described as a loophole, can mean the tax isn’t payable.
If a person leaves everything above the £325,000 threshold to a spouse, civil partner, a charity, or an amateur sports club, then there is usually no Inheritance Tax to pay.
Spouses and civil partners are permitted to provide one another with as much as they like during their lifetime, as long as they live in the UK on a permanent basis.
Gifts to individuals that are not immediately considered as tax free are known as ‘potentially exempt transfers’, meaning they will only be tax-free if a person survives for at least seven years after making the gift.
This is known as the seven-year rule and prevents people from dodging the tax, which puts billions into government coffers every year.
If a person does pass away within seven years of the gift being given, it will be subject to Inheritance Tax.
The government considers a gift as anything that has a value, such as money, property or possessions.
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John Stevenson, the Conservative chair of the APPG said: “The huge complexity around how the tax is levied, and the reliefs available on it, leads to lots of confusion and a strong sense of injustice.
“The rich get away with not paying, and IHT is perceived as an unfair penalty on hard working savers. Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT.”
However, there is speculation from experts Inheritance Tax could rise after the coronavirus crisis in order to finance higher government spending.
Director of Tax Research UK, Richard Murphy, told the Telegraph the group wished to see a wealth tax to fund COVID-19 recovery.
And Mike Warburton, the tax columnist for the paper, described a rise in the tax as “inevitable”.
Inheritance Tax is paid out of the deceased person’s estate to HMRC, and overseen by the executor of a will.
Published at Mon, 04 May 2020 13:28:00 +0000
