What is Inheritance Tax ?
At its simplest, it is a tax imposed on the value of
your estate when you die.
This tax has been known as:
Estate Duty or Capital Transfer Tax.
But today is commonly known as Inheritance Tax.
Over the years the name may have changed, but not
the effect it can have on families as they try to retain
the wealth that they have built up over a lifetime of
work and the savings they made for that proverbial rainy
day.
This tax is probably the most complex of all taxes.
What is Estate Planning ?
Well, Estate Planning is simply a series of strategies
which can be put in place whilst you are alive, to minimise,
or even eliminate, the liability for Inheritance Tax
on your estate, when you die.
It is a sad fact that we will all be paying tax until
we do die.
Even if we are amongst the ones who don't pay income
tax, we do pay indirect taxes such as V.A.T.
There is also a misconception that this tax is confined
to the very rich and whilst this may well have been
the initial intention of Government, due to several
issues, not least the recent increases in property values,
nowadays this tax impacts on many more families.
So!
Who pays the tax ?
Well the good news is that it isn’t you, simply
because your not around to pay it!!
But the bad news is that the people who must pay, are
the very people you would most like to benefit from
your wills and usually this will be your children and
grandchildren, So the very people to whom you would
like to leave your money, as a final legacy will also
inherit a tax bill, which could be very significant.
So what does this tax mean to you
?
Well!, when you die, your total estate must be valued.
This valuation includes all your personal assets, such
as your house and all its contents, your car, money,
any investments, which haven't been 'sheltered' appropriately
and certain types of gifts made in the previous 7 years.
From this total, the Inland Revenue will deduct any
debts and liabilities outstanding at the time of your
death, and a reasonable allowance to cover funeral expenses...
If the resulting total estate, and we do mean total
estate, including the lawnmower, jewellery, antiques,
carpets, curtains and more importantly, even the proceeds
of any Life Policies (not written in trust) that you
may have built up over the years, If that total estate
is valued at less than £300,000 for tax year
2007/8 NO Inheritance Tax is payable.
This is called the 'Nil Rate Band' allowance.(NRB)
That may sound very reasonable, but when you take into
account that absolutely everything is included in your
estate, I think you will agree that it’s a very
modest figure. For husband and wife there is usually
no liability on first death. All can pass to the surviving
spouse.
The problem is, that for many years, the Nil Rate Band
did not increase with inflation, and so a tax that perhaps
was initially intended to be paid by the rich is now
hitting most families.
If, as is so often the case, the total assets exceed
£300,000, when you die, a tax of 40% is charged
on the excess, with no exceptions.
Yes, that's right 40p in every £1 must be paid
to the Inland Revenue.
How does the tax work ?
Quite simply as your estate increases in value , through
inflation, and
investment growth, so the tax liability also increases.
As you can see...
| Estate |
£350,000 |
£400,000 |
£600,000 |
£1,000,000 |
| IHT Liability |
£20,000 |
£40,000 |
£120,000 |
£280,000 |
| % of Estate |
5.71% |
10% |
20% |
28% |
In this example we have FOUR estates valued between
£350,000, & £1,000,000.
The potential Inheritance Tax liability on the smaller
estate is calculated
at £20,000, which is 5.71% of the overall estate.
However, when the estate doubles in value to £600,000
the liability rises to
£120,000, donated to the Inland Revenue, which
represents 20% of the
estate...
But at one million pounds the Tax more than doubles
to £280,000.
that's almost a third of your estate going to the taxman.
It's true to say that:
THE BIGGER THE ESTATE ....the bigger the Tax bill !!!
|
