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Prudential representatives can only advise on Prudential products. Whilst Prudential uses reasonable efforts to ensure that the informationcontained in this Handy Guide is current and accurate at the date of publication, no warranties are made, either expressed or implied, as to thereliability, accuracy or completeness of the information. Prudential accepts no liability for any loss arising directly or indirectly from the use ofor action taken in reliance on such information. All the quotes in this Handy Guide remain the intellectual property of the persons referred to.Prudential does not assert any claims for copyright or other intellectual property rights with regard to these quotes. In quoting theseindividuals, Prudential does not in any way mean to imply that they endorse or approve of Prudential or its business. These documents shouldnot be copied, reproduced or redistributed, in whole or in part. "Prudential" is a trading name of The Prudential Assurance Company Limited, which is registered in England and Wales. This name is also usedby other companies within the Prudential Group, which between them provide a range of financial products including life assurance, pensions,savings and investment products. Registered Office at Laurence Pountney Hill, London EC4R 0HH. Registered number 15454. Authorised andregulated by the Financial Services Authority.
YOUR HANDY GUIDE TO
INHERITANCE TAX
How to leave more to those who matter– rather than the tax man
In the past, inheritance tax (IHT) was seen as something thataffected only the very wealthy. But with the rising standard ofliving and the ever increasing cost of housing, you may besurprised at just how many people now fall into the inheritancetax band.
The relatives of people who would never have considered themselves ‘rich’ arefinding themselves with an unexpected tax bill that could have been avoided. With a little knowledge and advice you can help ensure that your own family will not have to face this problem.
This handy guide from Prudential will give you a broad understanding of inheritancetax, and explain the sorts of things you can do to reduce your liability for it. We’llalso let you know where you can get further information and help.
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In the past, inheritance tax (IHT) was seen as something thataffected only the very wealthy. But with the rising standard ofliving and the ever increasing cost of housing, you may besurprised at just how many people now fall into the inheritancetax band.
The relatives of people who would never have considered themselves ‘rich’ arefinding themselves with an unexpected tax bill that could have been avoided. With a little knowledge and advice you can help ensure that your own family will not have to face this problem.
This handy guide from Prudential will give you a broad understanding of inheritancetax, and explain the sorts of things you can do to reduce your liability for it. We’llalso let you know where you can get further information and help.
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AND FINALLY
Technical terms explained 30Page
DECISIONS TO MAKE
6 What you can do about your 15inheritance tax liability
7 Five easy steps to inheritance 16tax planning
8 How to get going – a checklist 28
TAKING ACTION
9 What to do now 29Page
Page
Information and examples in thishandy guide are based on ourunderstanding, as at May 2007, of current taxation, legislation andHM Revenue & Customs practice, all of which are liable to changewithout notice.
YOUR WAY AROUND THE GUIDE
UNDERSTANDINGINHERITANCE TAX
1 Inheritance tax (IHT) explained 6
2 How rising house prices can make 8you liable for inheritance tax
3 How inheritance tax works 10
4 How to calculate your 12inheritance tax
5 How your domicile may affect 14inheritance tax
Page
4 5
AND FINALLY
Technical terms explained 30Page
DECISIONS TO MAKE
6 What you can do about your 15inheritance tax liability
7 Five easy steps to inheritance 16tax planning
8 How to get going – a checklist 28
TAKING ACTION
9 What to do now 29Page
Page
Information and examples in thishandy guide are based on ourunderstanding, as at May 2007, of current taxation, legislation andHM Revenue & Customs practice, all of which are liable to changewithout notice.
YOUR WAY AROUND THE GUIDE
UNDERSTANDINGINHERITANCE TAX
1 Inheritance tax (IHT) explained 6
2 How rising house prices can make 8you liable for inheritance tax
3 How inheritance tax works 10
4 How to calculate your 12inheritance tax
5 How your domicile may affect 14inheritance tax
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This could include:
property
investments
insurance policies (unless in an appropriate trust)
payment from a pension plan or employee deathbenefit (unless in a trust)
other assets e.g. cars, collections, jewellery,furniture
gifts you have made but still benefit from, forexample a house that you have given away butstill live in
certain gifts which you have made in the lastseven years
assets held in trust from which you receive somepersonal benefit, for example, an income.
Inheritance tax is a tax on the assets that belongto you when you die. ‘Assets’ include the total ofeverything you own and a share of anything youown jointly.
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For the tax year 2007/2008 no tax is charged on the value of your estate up to £300,000.This is known as the nil rate band or the inheritance tax threshold.
PRUDENTIAL www.pru.co.uk
1 INHERITANCE TAX (IHT) EXPLAINED continued
Everything above that is taxed at 40%. For example, on an estate worth £400,000, the taxcharge is calculated as:
£400,000 – £300,000 = £100,000 x 40% = £40,000
This represents 10% of the whole estate value. Furtherexamples are given below.
What’s more, theinheritance tax bill must be paid before the rest of your estatecan be released to yourbeneficiaries.
HOW MUCH OF YOUR ESTATE WILL BE EN ROUTE TO THE TAX MAN
Estate value Inheritance tax bill Proportion of the estate as IHT
Less than £300,000 £ 0 0.00%£400,000 £ 40,000 10.00%£500,000 £ 80,000 16.00%£600,000 £ 120,000 20.00%£700,000 £ 160,000 22.86%£800,000 £ 200,000 25.00%£900,000 £ 240,000 26.67%£1,000,000 £ 280,000 28.00%
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1 INHERITANCE TAX (IHT) EXPLAINED
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This could include:
property
investments
insurance policies (unless in an appropriate trust)
payment from a pension plan or employee deathbenefit (unless in a trust)
other assets e.g. cars, collections, jewellery,furniture
gifts you have made but still benefit from, forexample a house that you have given away butstill live in
certain gifts which you have made in the lastseven years
assets held in trust from which you receive somepersonal benefit, for example, an income.
Inheritance tax is a tax on the assets that belongto you when you die. ‘Assets’ include the total ofeverything you own and a share of anything youown jointly.
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For the tax year 2007/2008 no tax is charged on the value of your estate up to £300,000.This is known as the nil rate band or the inheritance tax threshold.
PRUDENTIAL www.pru.co.uk
1 INHERITANCE TAX (IHT) EXPLAINED continued
Everything above that is taxed at 40%. For example, on an estate worth £400,000, the taxcharge is calculated as:
£400,000 – £300,000 = £100,000 x 40% = £40,000
This represents 10% of the whole estate value. Furtherexamples are given below.
What’s more, theinheritance tax bill must be paid before the rest of your estatecan be released to yourbeneficiaries.
HOW MUCH OF YOUR ESTATE WILL BE EN ROUTE TO THE TAX MAN
Estate value Inheritance tax bill Proportion of the estate as IHT
Less than £300,000 £ 0 0.00%£400,000 £ 40,000 10.00%£500,000 £ 80,000 16.00%£600,000 £ 120,000 20.00%£700,000 £ 160,000 22.86%£800,000 £ 200,000 25.00%£900,000 £ 240,000 26.67%£1,000,000 £ 280,000 28.00%
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The starting point for inheritance tax is currently£300,000 (tax year 2007/2008). That may sound like a lot of money, but Prudential believes that the mainreason for the increasing number of people falling intothe inheritance tax band is rising house prices. If youconsider that the average house price in the UK is£186,954*, it’s easy to see how more and more peopleare finding themselves liable for inheritance tax.
When you add to the equity in your home your savingsaccounts, PEPs, ISAs, TESSAs, life assurance plans notwritten in trust (including death in service benefitsprovided by your employer), stocks and shares, jewellery,your car and so on, the value of your assets canmount up very quickly indeed.
2 HOW RISING HOUSE PRICES CAN MAKE YOULIABLE FOR INHERITANCE TAX
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2 HOW RISING HOUSE PRICES CAN MAKE YOU LIABLE FOR IHT continued
WHAT YOU CAN DO ABOUT INHERITANCE TAX
There are a range of options that can help reduce orremove the potential tax liability on your death. In thispocket planner we aim to give you a better understandingof some of the rules around inheritance tax and someinformation about possible solutions to your inheritancetax problem. However, individual circumstances vary andit is recommended that you seek personal advice fromyour Financial Adviser before taking any action.
9PRUDENTIAL www.pru.co.uk
Most people don’t like to think about what will happenwhen they die. Which is probably why we avoid makinga will or taking a serious look at our money and thefinancial impact our death will have on our families.However, Prudential can help to make it easier to sortout your affairs. We’ll show you how, with a littleforward planning, you can save your family financial painand ensure that they – and not HM Revenue & Customs– will benefit from your estate.
As Benjamin Franklin famously said:“NOTHING CAN BE SAID TO BE CERTAIN EXCEPT DEATH AND TAXES”
THE RISE IN HOUSE PRICES, OVER THE PAST 5 YEARS, COMPARED WITH THE RISE IN THE IHT THRESHOLD
Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006
Average UK house price* £ 121,137 £ 140,687 £ 161,742 £ 170,043 £ 186,954Percentage increase 16.1% 15.0% 5.1% 9.9%IHT threshold (nil rate band)** £ 250,000 £ 255,000 £ 263,000 £ 275,000 £ 285,000Percentage increase 2.0% 3.1% 4.6% 3.6%Average UK house price 48.5% 55.2% 61.5% 61.8% 65.6%as % of the IHT threshold
**Applicable from 6 April each year. The figure for tax year 2007/2008 is £300,000. Source: HM Revenue & Customs, March 2007.
*Source: http://www.hbosplc.com/economy/HistoricalDataSpreadsheet.asp,March 2007.
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The starting point for inheritance tax is currently£300,000 (tax year 2007/2008). That may sound like a lot of money, but Prudential believes that the mainreason for the increasing number of people falling intothe inheritance tax band is rising house prices. If youconsider that the average house price in the UK is£186,954*, it’s easy to see how more and more peopleare finding themselves liable for inheritance tax.
When you add to the equity in your home your savingsaccounts, PEPs, ISAs, TESSAs, life assurance plans notwritten in trust (including death in service benefitsprovided by your employer), stocks and shares, jewellery,your car and so on, the value of your assets canmount up very quickly indeed.
2 HOW RISING HOUSE PRICES CAN MAKE YOULIABLE FOR INHERITANCE TAX
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WHAT YOU CAN DO ABOUT INHERITANCE TAX
There are a range of options that can help reduce orremove the potential tax liability on your death. In thispocket planner we aim to give you a better understandingof some of the rules around inheritance tax and someinformation about possible solutions to your inheritancetax problem. However, individual circumstances vary andit is recommended that you seek personal advice fromyour Financial Adviser before taking any action.
9PRUDENTIAL www.pru.co.uk
Most people don’t like to think about what will happenwhen they die. Which is probably why we avoid makinga will or taking a serious look at our money and thefinancial impact our death will have on our families.However, Prudential can help to make it easier to sortout your affairs. We’ll show you how, with a littleforward planning, you can save your family financial painand ensure that they – and not HM Revenue & Customs– will benefit from your estate.
As Benjamin Franklin famously said:“NOTHING CAN BE SAID TO BE CERTAIN EXCEPT DEATH AND TAXES”
THE RISE IN HOUSE PRICES, OVER THE PAST 5 YEARS, COMPARED WITH THE RISE IN THE IHT THRESHOLD
Q4 2002 Q4 2003 Q4 2004 Q4 2005 Q4 2006
Average UK house price* £ 121,137 £ 140,687 £ 161,742 £ 170,043 £ 186,954Percentage increase 16.1% 15.0% 5.1% 9.9%IHT threshold (nil rate band)** £ 250,000 £ 255,000 £ 263,000 £ 275,000 £ 285,000Percentage increase 2.0% 3.1% 4.6% 3.6%Average UK house price 48.5% 55.2% 61.5% 61.8% 65.6%as % of the IHT threshold
**Applicable from 6 April each year. The figure for tax year 2007/2008 is £300,000. Source: HM Revenue & Customs, March 2007.
*Source: http://www.hbosplc.com/economy/HistoricalDataSpreadsheet.asp,March 2007.
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3 HOW INHERITANCE TAX WORKS
The following example is designed to represent a typicalsituation and does not relate to any particular individual.You should not look upon this as financial advice ora recommendation of a particular course of action.
EXAMPLE: MARGARET
Aged 63 and a widow, Margaret died in April 2007when the inheritance tax threshold was £300,000.
Margaret’s assets:
Her house £ 250,000Her car, household items, clothes, £ 36,000 jewellery, etc.Her investments £ 180,000
Total assets £ 466,000
Less:
Her debts and funeral expenses – £ 9,000
Margaret’s estate £ 457,000
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3 HOW INHERITANCE TAX WORKS continued
IHT at 0% (on the first £300,000) NilIHT at 40% (on remaining £157,000) £ 62,800
Inheritance tax bill £ 62,800
The tax bill of £62,800 represents a tax charge of 13.7%of the total value of Margaret’s estate. That means £1.37in every £10 of Margaret’s estate goes to the taxman.This bill will have to be paid in full before the estate canbe released to her two children. As Margaret’s childrendon’t have the money to pay it, they need to take out a short-term bank loan.
WHEN INHERITANCE TAX IS PAYABLE
Inheritance tax is normally payable within 6 monthsfrom the end of the month in which death occursand needs to be paid before your estate can bereleased to your beneficiaries. This means that therecan be delays in the distribution of the estate. It mightbe necessary to take out a short-term bank loan to paythe inheritance tax bill. In addition, interest is charged on any overdue tax – which can become an additionalcost to the estate.
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3 HOW INHERITANCE TAX WORKS
The following example is designed to represent a typicalsituation and does not relate to any particular individual.You should not look upon this as financial advice ora recommendation of a particular course of action.
EXAMPLE: MARGARET
Aged 63 and a widow, Margaret died in April 2007when the inheritance tax threshold was £300,000.
Margaret’s assets:
Her house £ 250,000Her car, household items, clothes, £ 36,000 jewellery, etc.Her investments £ 180,000
Total assets £ 466,000
Less:
Her debts and funeral expenses – £ 9,000
Margaret’s estate £ 457,000
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IHT at 0% (on the first £300,000) NilIHT at 40% (on remaining £157,000) £ 62,800
Inheritance tax bill £ 62,800
The tax bill of £62,800 represents a tax charge of 13.7%of the total value of Margaret’s estate. That means £1.37in every £10 of Margaret’s estate goes to the taxman.This bill will have to be paid in full before the estate canbe released to her two children. As Margaret’s childrendon’t have the money to pay it, they need to take out a short-term bank loan.
WHEN INHERITANCE TAX IS PAYABLE
Inheritance tax is normally payable within 6 monthsfrom the end of the month in which death occursand needs to be paid before your estate can bereleased to your beneficiaries. This means that therecan be delays in the distribution of the estate. It mightbe necessary to take out a short-term bank loan to paythe inheritance tax bill. In addition, interest is charged on any overdue tax – which can become an additionalcost to the estate.
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ESTATE/IHT CALCULATOR
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YOUR MAIN ASSETS
Current house value £
Bank account £
Savings account £
ISAs (Individual Savings Accounts) £
PEPs (Personal Equity Plans) £
Investment bonds £
Stocks and shares £
Personal possessions £
Share of co-owned property £
Car value £
Pension benefits not under trust £
Death in service benefits not under trust £
Other assets not listed above £
Total of main assets £ A
OTHER ASSETS
Gifts where you have retained a benefit £
Taxable gifts made within the last 7 years £
Interests under trusts £
Total of other assets £ B
YOUR LIABILITIES
Outstanding mortgage £
Outstanding loans £
Other outstanding liabilities £
Total liabilities £ C
YOUR INHERITANCE TAX (IHT) CALCULATION
Current estate value A + B – C £ D
Less current IHT threshold – £ 3 0 0 , 0 0 0 E
Amount liable for IHT D – E £ F
IHT payable F x 0.4 £ G
Beneficiaries would receive D – G £ H
4 HOW TO CALCULATE YOUR INHERITANCE TAXU
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Use the Estate Calculator opposite to work outyour potential liability to inheritance tax.
If the value of your estate for inheritance taxpurposes is more than the threshold (£300,000 for tax year 2007/2008), inheritance tax will bedue on death.
Remember that your future circumstances may changeyour inheritance tax position. For example, you maybecome the beneficiary of someone else’s will, whichmay mean there will be an even higher bill for yourbeneficiaries to pay. You should review the situationwhenever your financial circumstances change.
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ESTATE/IHT CALCULATOR
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YOUR MAIN ASSETS
Current house value £
Bank account £
Savings account £
ISAs (Individual Savings Accounts) £
PEPs (Personal Equity Plans) £
Investment bonds £
Stocks and shares £
Personal possessions £
Share of co-owned property £
Car value £
Pension benefits not under trust £
Death in service benefits not under trust £
Other assets not listed above £
Total of main assets £ A
OTHER ASSETS
Gifts where you have retained a benefit £
Taxable gifts made within the last 7 years £
Interests under trusts £
Total of other assets £ B
YOUR LIABILITIES
Outstanding mortgage £
Outstanding loans £
Other outstanding liabilities £
Total liabilities £ C
YOUR INHERITANCE TAX (IHT) CALCULATION
Current estate value A + B – C £ D
Less current IHT threshold – £ 3 0 0 , 0 0 0 E
Amount liable for IHT D – E £ F
IHT payable F x 0.4 £ G
Beneficiaries would receive D – G £ H
4 HOW TO CALCULATE YOUR INHERITANCE TAX
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Use the Estate Calculator opposite to work outyour potential liability to inheritance tax.
If the value of your estate for inheritance taxpurposes is more than the threshold (£300,000 for tax year 2007/2008), inheritance tax will bedue on death.
Remember that your future circumstances may changeyour inheritance tax position. For example, you maybecome the beneficiary of someone else’s will, whichmay mean there will be an even higher bill for yourbeneficiaries to pay. You should review the situationwhenever your financial circumstances change.
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The danger here is that, if you donothing, your estate may have aninheritance tax bill on your death.This may mean that assets youwish to leave to beneficiaries endup being sold to pay inheritancetax (or even to repay a loan takenout to pay the bill within thedeadline). It also means that HMRevenue & Customs could end upas one of the biggest beneficiariesof your estate.
SPEND YOUR MONEY
By spending your money youcould have lots of fun but willhave little or nothing to leave foryour beneficiaries. It’s also difficultto budget for, as you can’t be sureexactly when you’re going to die.Buying assets won’t solve theproblem either, as your estatewould still be worth the same. So some of the assets you were hoping to leave to yourbeneficiaries may have to be soldto pay your inheritance tax billinstead (or the loan taken out to pay the bill). Once again, theRevenue could end up as one of your biggest beneficiaries.
A B C
5 HOW YOUR DOMICILE MAY AFFECT INHERITANCE TAX 6 WHAT YOU CAN DO ABOUT YOUR INHERITANCE TAX LIABILITY
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It matters because, if you are UK domiciled,inheritance tax is payable on your worldwide assets. If you are non-UK domiciled inheritance tax is onlypayable on your assets which are situated in the UK(subject to certain exceptions).
If you or your spouse or civil partner is non-UKdomiciled, please speak to a Financial Adviser about theoptions available to you regarding inheritance tax.
Your domicile is generally decided at birth and willusually be the home country of your father. If yourfather was born in the UK and has always or mostly livedthere, you will be classed as UK domiciled. However, if you are non-UK domiciled but have lived in the UK for 17 out of the last 20 years, you will be treated as UK domiciled for inheritance tax purposes.
INHERITANCE TAXPLANNING
Careful planning with a little help from Prudential can help you ensure that your inheritancetax bill is either reduced orcompletely wiped out. Your estatewill then pass to your beneficiariesrather than to the tax man. What’s more, tax planning neednot mean giving up access to all of your money.
1514 PRUDENTIAL www.pru.co.uk
DEC
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DO NOTHING
The danger here is that, if you donothing, your estate may have aninheritance tax bill on your death.This may mean that assets youwish to leave to beneficiaries endup being sold to pay inheritancetax (or even to repay a loan takenout to pay the bill within thedeadline). It also means that HMRevenue & Customs could end upas one of the biggest beneficiariesof your estate.
SPEND YOUR MONEY
By spending your money youcould have lots of fun but willhave little or nothing to leave foryour beneficiaries. It’s also difficultto budget for, as you can’t be sureexactly when you’re going to die.Buying assets won’t solve theproblem either, as your estatewould still be worth the same. So some of the assets you were hoping to leave to yourbeneficiaries may have to be soldto pay your inheritance tax billinstead (or the loan taken out to pay the bill). Once again, theRevenue could end up as one of your biggest beneficiaries.
A B C
5 HOW YOUR DOMICILE MAY AFFECT INHERITANCE TAX 6 WHAT YOU CAN DO ABOUT YOUR INHERITANCE TAX LIABILITY
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It matters because, if you are UK domiciled,inheritance tax is payable on your worldwide assets. If you are non-UK domiciled inheritance tax is onlypayable on your assets which are situated in the UK(subject to certain exceptions).
If you or your spouse or civil partner is non-UKdomiciled, please speak to a Financial Adviser about theoptions available to you regarding inheritance tax.
Your domicile is generally decided at birth and willusually be the home country of your father. If yourfather was born in the UK and has always or mostly livedthere, you will be classed as UK domiciled. However, if you are non-UK domiciled but have lived in the UK for 17 out of the last 20 years, you will be treated as UK domiciled for inheritance tax purposes.
INHERITANCE TAXPLANNING
Careful planning with a little help from Prudential can help you ensure that your inheritancetax bill is either reduced orcompletely wiped out. Your estatewill then pass to your beneficiariesrather than to the tax man. What’s more, tax planning neednot mean giving up access to all of your money.
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7 FIVE EASY STEPS TO INHERITANCE TAX PLANNING 7 FIVE EASY STEPS TO INHERITANCE TAX PLANNING continued
CONSIDER EXEMPTIONS
There are a number of exemptions you can use toreduce the value of your estate. Taking advantageof as many of them as you can is the mostefficient way to reduce an inheritance tax bill.
These exemptions include:
All assets transferred between spouses or civilpartners (for more information please read Spouseand Civil Partner Exemption on page 19).Up to £3,000 given away each tax year, which isknown as your annual exemption allowance.If you give away less than this one year, you canadd the balance to the next year’s allowance, but if you don’t use it then it will be lost. Forexample, if you didn’t make any gifts last year,your allowance this year would be £6,000.
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MAKE A WILL
The first step in inheritance tax planning is to make awill. Without a will, your estate will be shared outunder intestacy rules, which could mean that thethings you leave don’t go to the people you wouldhave chosen. Also, more inheritance tax may bepayable than if you had made an efficient will. The best way to make a will is to seek expertadvice from a lawyer or will writing specialist.All you need do is decide to whom you wish to leaveitems from your estate.
A will can sometimes be altered once death hasoccurred, but only with the agreement of all thebeneficiaries affected. This is a complex area and isnot a substitute for tax planning. Professional legaladvice would be necessary.
1Benjamin Franklin was wrong about all taxes beinga certainty. There are five steps you could take tohelp reduce your liability to inheritance tax.
B MAKE A WILL
CONSIDER EXEMPTIONS
CONSIDER GIFTS
CONSIDER LIFE ASSURANCE
CONSIDER TRUSTS
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CONSIDER EXEMPTIONS
There are a number of exemptions you can use toreduce the value of your estate. Taking advantageof as many of them as you can is the mostefficient way to reduce an inheritance tax bill.
These exemptions include:
All assets transferred between spouses or civilpartners (for more information please read Spouseand Civil Partner Exemption on page 19).Up to £3,000 given away each tax year, which isknown as your annual exemption allowance.If you give away less than this one year, you canadd the balance to the next year’s allowance, but if you don’t use it then it will be lost. Forexample, if you didn’t make any gifts last year,your allowance this year would be £6,000.
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MAKE A WILL
The first step in inheritance tax planning is to make awill. Without a will, your estate will be shared outunder intestacy rules, which could mean that thethings you leave don’t go to the people you wouldhave chosen. Also, more inheritance tax may bepayable than if you had made an efficient will. The best way to make a will is to seek expertadvice from a lawyer or will writing specialist.All you need do is decide to whom you wish to leaveitems from your estate.
A will can sometimes be altered once death hasoccurred, but only with the agreement of all thebeneficiaries affected. This is a complex area and isnot a substitute for tax planning. Professional legaladvice would be necessary.
1Benjamin Franklin was wrong about all taxes beinga certainty. There are five steps you could take tohelp reduce your liability to inheritance tax.
B MAKE A WILL
CONSIDER EXEMPTIONS
CONSIDER GIFTS
CONSIDER LIFE ASSURANCE
CONSIDER TRUSTS
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3
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5
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CONSIDER EXEMPTIONS continued
Gifts you make as part of normal expenditureout of income, such as regular payments for agifted life assurance policy.Gifts on marriage or civil partnership:
£5,000 to a child or to their spouse or civilpartner,£2,500 to a grandchild or to their spouseor civil partner, and£1,000 to anyone else.
Payments for the maintenance of your spouse or civil partner, ex-spouse or ex-civil partner,dependent relatives and, usually, your children if they are in full-time education or under 18.Gifts of up to £250 per person in any one tax year.Gifts to charities and political parties(including gifts made on death).
Some of these exemptions can be combined.For example, you could give £8,000 to your childwhen they get married. £5,000 would be exempt as a gift to your child on their wedding and theadditional £3,000 could be your annual exemptionallowance for that tax year.
Certain reliefs may be available for business relatedproperty.
These include:
agricultural property reliefbusiness property relief.
For more information on these reliefs please speak to your Financial Adviser.
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SPOUSE AND CIVIL PARTNER EXEMPTION
If your spouse or civil partner is UK domiciled, thisexemption ensures that any assets that go tothem when you die will be free of inheritancetax. This exemption is very useful for most coupleswho are married or in a civil partnership. It meansthey can avoid inheritance tax on the first death bypassing all their assets to their spouse or civil partnerthrough their will.
But when the surviving spouse or partner dies,inheritance tax may then be payable on all the assetsthat he or she inherited on the first death. So byleaving everything to your spouse or civil partner,you may only be delaying payment of inheritancetax, not avoiding it.
What’s more, because this solution doesn’t make best use of the inheritance tax threshold, the eventual tax bill may be higher than it could have been.
Making sure that you make effective use of theinheritance tax threshold is an important part ofinheritance tax planning for married couples andcivil partners and a matter on which you shouldconsider taking further advice.
The example on the following page shows howHenry’s family could have avoided having to payinheritance tax by taking account of inheritance tax thresholds and planning accordingly.
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Gifts you make as part of normal expenditureout of income, such as regular payments for agifted life assurance policy.Gifts on marriage or civil partnership:
£5,000 to a child or to their spouse or civilpartner,£2,500 to a grandchild or to their spouseor civil partner, and£1,000 to anyone else.
Payments for the maintenance of your spouse or civil partner, ex-spouse or ex-civil partner,dependent relatives and, usually, your children if they are in full-time education or under 18.Gifts of up to £250 per person in any one tax year.Gifts to charities and political parties(including gifts made on death).
Some of these exemptions can be combined.For example, you could give £8,000 to your childwhen they get married. £5,000 would be exempt as a gift to your child on their wedding and theadditional £3,000 could be your annual exemptionallowance for that tax year.
Certain reliefs may be available for business relatedproperty.
These include:
agricultural property reliefbusiness property relief.
For more information on these reliefs please speak to your Financial Adviser.
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SPOUSE AND CIVIL PARTNER EXEMPTION
If your spouse or civil partner is UK domiciled, thisexemption ensures that any assets that go tothem when you die will be free of inheritancetax. This exemption is very useful for most coupleswho are married or in a civil partnership. It meansthey can avoid inheritance tax on the first death bypassing all their assets to their spouse or civil partnerthrough their will.
But when the surviving spouse or partner dies,inheritance tax may then be payable on all the assetsthat he or she inherited on the first death. So byleaving everything to your spouse or civil partner,you may only be delaying payment of inheritancetax, not avoiding it.
What’s more, because this solution doesn’t make best use of the inheritance tax threshold, the eventual tax bill may be higher than it could have been.
Making sure that you make effective use of theinheritance tax threshold is an important part ofinheritance tax planning for married couples andcivil partners and a matter on which you shouldconsider taking further advice.
The example on the following page shows howHenry’s family could have avoided having to payinheritance tax by taking account of inheritance tax thresholds and planning accordingly.
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CONSIDER GIFTS
If you can afford to give away some of theassets you own, it may be possible to reducethe size of your estate, which could reduce yourpotential inheritance tax bill. Any gifts you make thatfall within one of the exemptions listed on pages17–18 will immediately be outside your estate andtheir value will not be subject to inheritance tax.
It is possible to make other gifts to reduce the valueof your estate. These gifts are known as potentiallyexempt transfers (PETs). There are strict rules thathave to be followed when a potentially exempttransfer is made. But if they are followed, then sevenyears after the gift is made it won’t be consideredpart of your estate for inheritance tax purposes.
These rules are:
Once you have gifted something away youcannot benefit from it. For example, youcannot gift your house to your children andcontinue to live in it rent free. If you do, theremay be an annual income tax charge on the valueof the benefit you enjoy or HMRC Capital Taxeswill charge inheritance tax on the value of the giftas though it had not been made.You must survive for seven years from thedate that you made the gift.
The example on the following pages shows whatWendy’s inheritance tax bill would be on making agift if she survives seven years, and also if she dieswithin seven years.
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This example is designed to represent a typicalsituation and does not relate to any particularindividual. You should not look upon this asfinancial advice or a recommendation of aparticular course of action.
Henry died recently. His assets totalled £350,000. This was more than the IHT threshold at that time.
Thanks to the spouse and civil partner exemptionthere was no inheritance tax bill for his wife Jane to worry about when he died because Henry’s will gave all his assets to Jane.
The problem now is that Jane already had assets of her own totalling £150,000 when Henry died.
Jane’s assets now total £500,000
Currently (in the tax year 2007/2008) inheritance taxis payable at 40% on everything over £300,000, sothere will be no inheritance tax on the first £300,000.
BUT inheritance tax on the other £200,000 will be at 40% = £80,000.
Based on these figures, when Jane dies, theinheritance tax bill on her assets totalling £500,000will be £80,000 – ie. 16% of everything that Jane now owns. Her heirs, who are her children, will haveto pay this before getting any of their inheritance.
However, Henry and Jane could have obtainedadvice on how to make use of the inheritance taxthreshold for each of them. For instance, if Henry’swill had given £200,000 to his children, this wouldhave been below the threshold, so there would havebeen no inheritance tax to pay. Jane’s assets wouldthen have totalled £300,000 and this, too, wouldhave been below the threshold. So their childrenwould have avoided inheritance tax altogether.
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CONSIDER GIFTS
If you can afford to give away some of theassets you own, it may be possible to reducethe size of your estate, which could reduce yourpotential inheritance tax bill. Any gifts you make thatfall within one of the exemptions listed on pages17–18 will immediately be outside your estate andtheir value will not be subject to inheritance tax.
It is possible to make other gifts to reduce the valueof your estate. These gifts are known as potentiallyexempt transfers (PETs). There are strict rules thathave to be followed when a potentially exempttransfer is made. But if they are followed, then sevenyears after the gift is made it won’t be consideredpart of your estate for inheritance tax purposes.
These rules are:
Once you have gifted something away youcannot benefit from it. For example, youcannot gift your house to your children andcontinue to live in it rent free. If you do, theremay be an annual income tax charge on the valueof the benefit you enjoy or HMRC Capital Taxeswill charge inheritance tax on the value of the giftas though it had not been made.You must survive for seven years from thedate that you made the gift.
The example on the following pages shows whatWendy’s inheritance tax bill would be on making agift if she survives seven years, and also if she dieswithin seven years.
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This example is designed to represent a typicalsituation and does not relate to any particularindividual. You should not look upon this asfinancial advice or a recommendation of aparticular course of action.
Henry died recently. His assets totalled £350,000. This was more than the IHT threshold at that time.
Thanks to the spouse and civil partner exemptionthere was no inheritance tax bill for his wife Jane to worry about when he died because Henry’s will gave all his assets to Jane.
The problem now is that Jane already had assets of her own totalling £150,000 when Henry died.
Jane’s assets now total £500,000
Currently (in the tax year 2007/2008) inheritance taxis payable at 40% on everything over £300,000, sothere will be no inheritance tax on the first £300,000.
BUT inheritance tax on the other £200,000 will be at 40% = £80,000.
Based on these figures, when Jane dies, theinheritance tax bill on her assets totalling £500,000will be £80,000 – ie. 16% of everything that Jane now owns. Her heirs, who are her children, will haveto pay this before getting any of their inheritance.
However, Henry and Jane could have obtainedadvice on how to make use of the inheritance taxthreshold for each of them. For instance, if Henry’swill had given £200,000 to his children, this wouldhave been below the threshold, so there would havebeen no inheritance tax to pay. Jane’s assets wouldthen have totalled £300,000 and this, too, wouldhave been below the threshold. So their childrenwould have avoided inheritance tax altogether.
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This example is designed to represent a typical situation and does not relate to any particular individual.You should not look upon this as financial advice or a recommendation of a particular course of action. You should consider your own circumstances fully.
Wendy is widowed and has total assets of £606,000.
This means that the inheritance tax bill if she dieswill be £122,400 – because there will be no tax on£300,000 of her assets, but the other £306,000 will be taxed at 40%.
Currently Wendy’s will divides her assets equallybetween her son Sam and her daughter Daphne. Sothe inheritance tax bill will be divided between them – £61,200 each.
Based on the current value of her assets and current(2007/2008) inheritance tax rates, there will be no IHT if Wendy gives away £306,000 and survives forseven years.
IF WENDY SURVIVES SEVEN YEARS
Wendy makes a gift of £306,000 to her son Samwhich he receives immediately.
Once Wendy has survived seven years, all of the£306,000 gift to Sam will be exempt from inheritancetax (because there is no inheritance tax liabilityafter seven years).There will be no inheritance tax bill for Sam.
Wendy makes a new will giving all her other assets to her daughter Daphne. That’s £300,000 for Daphnewhen Wendy dies.
Inheritance tax will only be assessed on Daphne’s£300,000 inheritance from Wendy.This will all be within Wendy’s inheritance taxthreshold.There will be no inheritance tax bill for Daphne.
IF WENDY DIES WITHIN SEVEN YEARS
Wendy needs to remember that her gift to Sam will not become exempt from inheritance tax until she hassurvived seven years. If she dies within seven yearsthere will still be an inheritance tax bill on Sam’s gift.
£6,000 (£3,000 for this tax year and £3,000 for theprevious tax year) of the £306,000 gift to Sam will beexempt from inheritance tax, thanks to Wendy’s annualexemption allowance for the tax year when she made the gift. Thus inheritance tax will be potentially chargeable on the rest of the gift to Sam (£300,000) and all of Daphne’s inheritance (£300,000).
So the total sum assessed for inheritance tax on Wendy’s death will be £600,000.
Under the inheritance tax rules, any gifts made in the last seven years before Wendy’s death must beoffset against the inheritance tax threshold before thebalance of her estate is taken into account. This meansthat the entire inheritance tax bill will fall on Daphne’sinheritance, as follows.
The gift of £300,000 made to Sam will be offsetagainst Wendy’s inheritance tax threshold, meaningthat there will be no tax to pay on this.The balance of Wendy’s estate, the £300,000 which
is Daphne’s inheritance, will be taxed at 40%,resulting in a tax bill of £120,000.
This example is based throughout on the current (2007/2008) inheritance tax
threshold and rates. In practice, these may change in future.
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This example is designed to represent a typical situation and does not relate to any particular individual.You should not look upon this as financial advice or a recommendation of a particular course of action. You should consider your own circumstances fully.
Wendy is widowed and has total assets of £606,000.
This means that the inheritance tax bill if she dieswill be £122,400 – because there will be no tax on£300,000 of her assets, but the other £306,000 will be taxed at 40%.
Currently Wendy’s will divides her assets equallybetween her son Sam and her daughter Daphne. Sothe inheritance tax bill will be divided between them – £61,200 each.
Based on the current value of her assets and current(2007/2008) inheritance tax rates, there will be no IHT if Wendy gives away £306,000 and survives forseven years.
IF WENDY SURVIVES SEVEN YEARS
Wendy makes a gift of £306,000 to her son Samwhich he receives immediately.
Once Wendy has survived seven years, all of the£306,000 gift to Sam will be exempt from inheritancetax (because there is no inheritance tax liabilityafter seven years).There will be no inheritance tax bill for Sam.
Wendy makes a new will giving all her other assets to her daughter Daphne. That’s £300,000 for Daphnewhen Wendy dies.
Inheritance tax will only be assessed on Daphne’s£300,000 inheritance from Wendy.This will all be within Wendy’s inheritance taxthreshold.There will be no inheritance tax bill for Daphne.
IF WENDY DIES WITHIN SEVEN YEARS
Wendy needs to remember that her gift to Sam will not become exempt from inheritance tax until she hassurvived seven years. If she dies within seven yearsthere will still be an inheritance tax bill on Sam’s gift.
£6,000 (£3,000 for this tax year and £3,000 for theprevious tax year) of the £306,000 gift to Sam will beexempt from inheritance tax, thanks to Wendy’s annualexemption allowance for the tax year when she made the gift. Thus inheritance tax will be potentially chargeable on the rest of the gift to Sam (£300,000) and all of Daphne’s inheritance (£300,000).
So the total sum assessed for inheritance tax on Wendy’s death will be £600,000.
Under the inheritance tax rules, any gifts made in the last seven years before Wendy’s death must beoffset against the inheritance tax threshold before thebalance of her estate is taken into account. This meansthat the entire inheritance tax bill will fall on Daphne’sinheritance, as follows.
The gift of £300,000 made to Sam will be offsetagainst Wendy’s inheritance tax threshold, meaningthat there will be no tax to pay on this.The balance of Wendy’s estate, the £300,000 which
is Daphne’s inheritance, will be taxed at 40%,resulting in a tax bill of £120,000.
This example is based throughout on the current (2007/2008) inheritance tax
threshold and rates. In practice, these may change in future.
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Remember that the person you have given the assetto may have to pay capital gains tax on any futuregrowth in value when they come to dispose of it.
INCOME TAX
You risk a potential income tax bill if you benefit fromassets you have given away. This can occur if yougive away assets or buy them for someone else, butcontinue to use them free of charge or at a low cost.Remember to take tax advice if you are consideringmaking a transfer of this type.
Please also remember that any income from the assetyou have gifted to someone will be subject to incometax and their income tax rate may be higher than yours.
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A life assurance plan, placed under trust, will notlessen the inheritance tax bill but can be used to pay the bill on death. Provided the plan is placedunder a suitable trust, it will not form part of your estate and the money is availableimmediately on death. The plan must be set upcarefully because, if you make a mistake, you couldactually make the inheritance tax bill even biggerthan it would have been without the plan. Youshould seek advice from a Financial Adviser.
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POTENTIALLY EXEMPT TRANSFERS AND TAPER RELIEF
If a person dies between three and seven yearsafter making a gift, there may be some taper reliefon the amount of tax to be paid. The table belowshows how the percentage of tax payable decreases:
After 3 to 4 years 80% of tax payable
After 4 to 5 years 60% of tax payable
After 5 to 6 years 40% of tax payable
After 6 to 7 years 20% of tax payable
However, it is important to remember that this reliefis on the amount of tax payable. If the value ofthe gift falls within the inheritance tax thresholdwhen the estate value is calculated, there will be no benefit from taper relief.
So in Wendy’s example above, even if she dies sixyears after making the gift, the tax bill on her estatewill still be £120,000. This is because her gift to Samhas used up the inheritance tax threshold first, leavingher estate, which is not eligible for taper relief.
One way to cover the inheritance tax bill on a gift is to take out a seven-year decreasing lifeassurance plan, written under an appropriate trust,to pay the inheritance tax liability if you should diewithin seven years of making the gift.
CAPITAL GAINS TAX
Making a gift of certain assets that have grown invalue since you acquired them may mean that youhave to pay capital gains tax on them, as if you hadsold them.
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Remember that the person you have given the assetto may have to pay capital gains tax on any futuregrowth in value when they come to dispose of it.
INCOME TAX
You risk a potential income tax bill if you benefit fromassets you have given away. This can occur if yougive away assets or buy them for someone else, butcontinue to use them free of charge or at a low cost.Remember to take tax advice if you are consideringmaking a transfer of this type.
Please also remember that any income from the assetyou have gifted to someone will be subject to incometax and their income tax rate may be higher than yours.
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CONSIDER LIFE ASSURANCE
A life assurance plan, placed under trust, will notlessen the inheritance tax bill but can be used to pay the bill on death. Provided the plan is placedunder a suitable trust, it will not form part of your estate and the money is availableimmediately on death. The plan must be set upcarefully because, if you make a mistake, you couldactually make the inheritance tax bill even biggerthan it would have been without the plan. Youshould seek advice from a Financial Adviser.
4CONSIDER GIFTS continued
POTENTIALLY EXEMPT TRANSFERS AND TAPER RELIEF
If a person dies between three and seven yearsafter making a gift, there may be some taper reliefon the amount of tax to be paid. The table belowshows how the percentage of tax payable decreases:
After 3 to 4 years 80% of tax payable
After 4 to 5 years 60% of tax payable
After 5 to 6 years 40% of tax payable
After 6 to 7 years 20% of tax payable
However, it is important to remember that this reliefis on the amount of tax payable. If the value ofthe gift falls within the inheritance tax thresholdwhen the estate value is calculated, there will be no benefit from taper relief.
So in Wendy’s example above, even if she dies sixyears after making the gift, the tax bill on her estatewill still be £120,000. This is because her gift to Samhas used up the inheritance tax threshold first, leavingher estate, which is not eligible for taper relief.
One way to cover the inheritance tax bill on a gift is to take out a seven-year decreasing lifeassurance plan, written under an appropriate trust,to pay the inheritance tax liability if you should diewithin seven years of making the gift.
CAPITAL GAINS TAX
Making a gift of certain assets that have grown invalue since you acquired them may mean that youhave to pay capital gains tax on them, as if you hadsold them.
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CONSIDER TRUSTS
A trust is a legal arrangement where you choose athird party (called a Trustee) to hold some of yourassets for someone else (called a beneficiary). Ifstructured carefully, trusts can help to reduceor even eliminate your inheritance tax liability.
Some trusts involve making a gift, which will reducethe value of your estate. Like any other gift notcovered by one of the exemptions mentioned, theassets placed into certain trusts are considered to bea potentially exempt transfer. If you survive for sevenyears there will be no inheritance tax to pay on thevalue of the gift. With other trusts there may besome tax to pay, but you can keep control of theasset that you want to gift.
Prudential offers a range of inheritance tax trusts,designed to help lower or prevent a bill on your death.
These include:
a loan trust, which allows you free access toyour capital, while investment growth goes toyour beneficiaries after your deatha gift trust, which lets you make outright gifts to your beneficiariesa discounted gift trust, which allows you tohave regular payments from the trust while thebalance goes to your beneficiaries after yourdeath, andan excluded property trust, which can protectoffshore investments for non-UK domiciled people.
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FINANCE ACT 2006
The Finance Act 2006 introduced new rules for thetaxation of trusts. These affect most types of flexible,or discretionary, trusts, while the rules for absolute,or bare, trusts remain the same.
The main difference between the two types of trust isthat with an absolute trust you cannot change thebeneficiaries or their share of the trust fund, once thetrust has been set up. With a discretionary trust, you can make changes if you wish. However, you payfor that flexibility with potential inheritance tax charges. If the amount put into the trust is more than the nil rateband (or you have made previous chargeable transfersthat, together with the money put into the trust, takeyou over the nil rate band), there may be an immediatecharge of 20% when the trust is set up.
There may also be a periodic charge, every 10 years,of up to 6% and an exit charge, also of up to 6%,when money is distributed from the trust tobeneficiaries.
With an absolute trust, there will be no inheritancetax as long as you survive for at least seven years after setting up the trust. Trusts are complicated and must be set up very carefully. You should speak to a Financial Adviser who will advise you on what trust, if any, would be best for your needs.
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CONSIDER TRUSTS
A trust is a legal arrangement where you choose athird party (called a Trustee) to hold some of yourassets for someone else (called a beneficiary). Ifstructured carefully, trusts can help to reduceor even eliminate your inheritance tax liability.
Some trusts involve making a gift, which will reducethe value of your estate. Like any other gift notcovered by one of the exemptions mentioned, theassets placed into certain trusts are considered to bea potentially exempt transfer. If you survive for sevenyears there will be no inheritance tax to pay on thevalue of the gift. With other trusts there may besome tax to pay, but you can keep control of theasset that you want to gift.
Prudential offers a range of inheritance tax trusts,designed to help lower or prevent a bill on your death.
These include:
a loan trust, which allows you free access toyour capital, while investment growth goes toyour beneficiaries after your deatha gift trust, which lets you make outright gifts to your beneficiariesa discounted gift trust, which allows you tohave regular payments from the trust while thebalance goes to your beneficiaries after yourdeath, andan excluded property trust, which can protectoffshore investments for non-UK domiciled people.
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FINANCE ACT 2006
The Finance Act 2006 introduced new rules for thetaxation of trusts. These affect most types of flexible,or discretionary, trusts, while the rules for absolute,or bare, trusts remain the same.
The main difference between the two types of trust isthat with an absolute trust you cannot change thebeneficiaries or their share of the trust fund, once thetrust has been set up. With a discretionary trust, you can make changes if you wish. However, you payfor that flexibility with potential inheritance tax charges. If the amount put into the trust is more than the nil rateband (or you have made previous chargeable transfersthat, together with the money put into the trust, takeyou over the nil rate band), there may be an immediatecharge of 20% when the trust is set up.
There may also be a periodic charge, every 10 years,of up to 6% and an exit charge, also of up to 6%,when money is distributed from the trust tobeneficiaries.
With an absolute trust, there will be no inheritancetax as long as you survive for at least seven years after setting up the trust. Trusts are complicated and must be set up very carefully. You should speak to a Financial Adviser who will advise you on what trust, if any, would be best for your needs.
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Now you know a little about how to minimiseyour potential inheritance tax liability, and we hope you feel prompted to reduce it. It isvital that you think about this now to ensurethat your good intentions are not wasted.
SPEAK TO SOMEONE ABOUT WRITING A WILL
SPEAK TO A TAX SPECIALIST TO FIND A WAY TO AVOID INHERITANCE TAX
Once you have your plans in place, we would alsoencourage you to review your position with yourFinancial Adviser from time to time. If there is a change in your financial position or you change your will youshould review your inheritance tax liability to ensure that your plans remain right for you.
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9 WHAT TO DO NOWSPEAK TO AN EXPERT
For help and advice on inheritance tax, Prudentialrecommends you consult with a Financial Adviser.
A Financial Adviser will assess your individual needsand circumstances before recommending relevantproducts (not necessarily from Prudential).
For information on Prudential products and services you can:
visit us 24 hours a day at www.pru.co.uk
Existing Prudential customers can:
email us via PruMail – our secure email system – if you wish to contact us about an existing policy. Log on to Pru.co.uk for more information.
Some Prudential products are only available throughFinancial Advisers as we believe they requirespecialist advice.
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Now you know a little about how to minimiseyour potential inheritance tax liability, and we hope you feel prompted to reduce it. It isvital that you think about this now to ensurethat your good intentions are not wasted.
SPEAK TO SOMEONE ABOUT WRITING A WILL
SPEAK TO A TAX SPECIALIST TO FIND A WAY TO AVOID INHERITANCE TAX
Once you have your plans in place, we would alsoencourage you to review your position with yourFinancial Adviser from time to time. If there is a change in your financial position or you change your will youshould review your inheritance tax liability to ensure that your plans remain right for you.
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For help and advice on inheritance tax, Prudentialrecommends you consult with a Financial Adviser.
A Financial Adviser will assess your individual needsand circumstances before recommending relevantproducts (not necessarily from Prudential).
For information on Prudential products and services you can:
visit us 24 hours a day at www.pru.co.uk
Existing Prudential customers can:
email us via PruMail – our secure email system – if you wish to contact us about an existing policy. Log on to Pru.co.uk for more information.
Some Prudential products are only available throughFinancial Advisers as we believe they requirespecialist advice.
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TECHNICAL TERMS EXPLAINED continued
Taper reliefWhen the total value of all gifts made between three and seven years before a death is more than theinheritance tax threshold at death, taper relief is due.The relief increases the longer the time between the gift and death. It reduces the amount of tax payable, not the value of the gift itself.
TrustsA vehicle for holding funds or property for the benefit ofothers. It may reduce or avoid inheritance tax on death.
Inheritance tax thresholdThe amount up to which no inheritance tax is chargedon your estate, sometimes called the nil rate band.
IntestacyDying without leaving a will.
Life assuranceA type of insurance policy that pays out when theinsured person dies.
Potentially exempt transfers (PETs)A PET is a gift which will become exempt frominheritance tax if the donor lives for seven years after the date of the gift.
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TECHNICAL TERMS EXPLAINEDA
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DomicileIn general terms, a domicile is the country which aperson regards as their permanent home.
EstateEverything you own. Your estate includes assets held inyour sole name, your share of jointly owned assets andthe value of an alternatively secured pension fund (ASP).
ExemptionsTypes of gift that are exempt from inheritance tax.
Inheritance taxA tax on certain assets that belong to you when you die.
BeneficiaryA person who benefits from a will or a trust.
Capital gains tax (CGT)You may have to pay capital gains tax on any profits over a set allowance when you sell assets such as sharesor property. You are allowed to make gains up to acertain amount each tax year which are exempt from tax (£9,200 for the tax year 2007/2008). Everyone hastheir own individual allowance so it may be possible forcouples to make a combined gain before they have topay tax – although each individual’s circumstances areconsidered separately.
Some gains you make are exempt from capital gains tax.These include gains from the sale of your car, PersonalEquity Plans and Individual Savings Accounts. Also, youdo not have to pay capital gains tax when you sell yourhome provided certain conditions are met.
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TECHNICAL TERMS EXPLAINED continued
Taper reliefWhen the total value of all gifts made between three and seven years before a death is more than theinheritance tax threshold at death, taper relief is due.The relief increases the longer the time between the gift and death. It reduces the amount of tax payable, not the value of the gift itself.
TrustsA vehicle for holding funds or property for the benefit ofothers. It may reduce or avoid inheritance tax on death.
Inheritance tax thresholdThe amount up to which no inheritance tax is chargedon your estate, sometimes called the nil rate band.
IntestacyDying without leaving a will.
Life assuranceA type of insurance policy that pays out when theinsured person dies.
Potentially exempt transfers (PETs)A PET is a gift which will become exempt frominheritance tax if the donor lives for seven years after the date of the gift.
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DomicileIn general terms, a domicile is the country which aperson regards as their permanent home.
EstateEverything you own. Your estate includes assets held inyour sole name, your share of jointly owned assets andthe value of an alternatively secured pension fund (ASP).
ExemptionsTypes of gift that are exempt from inheritance tax.
Inheritance taxA tax on certain assets that belong to you when you die.
BeneficiaryA person who benefits from a will or a trust.
Capital gains tax (CGT)You may have to pay capital gains tax on any profits over a set allowance when you sell assets such as sharesor property. You are allowed to make gains up to acertain amount each tax year which are exempt from tax (£9,200 for the tax year 2007/2008). Everyone hastheir own individual allowance so it may be possible forcouples to make a combined gain before they have topay tax – although each individual’s circumstances areconsidered separately.
Some gains you make are exempt from capital gains tax.These include gains from the sale of your car, PersonalEquity Plans and Individual Savings Accounts. Also, youdo not have to pay capital gains tax when you sell yourhome provided certain conditions are met.
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YOUR HANDY GUIDE TO
INHERITANCE TAX
How to leave more to those who matter– rather than the tax man
