Inheritance tax introduced
Inheritance tax is a tax that is paid on an individual’s estate either whilst alive or after their death.
This estate would include all their worldwide assets.
The common misconception is that the inheritance tax is paid only when we die.
This is far from the truth because it’s also paid on transfer of value from the estate when alive.
How is inheritance tax calculated?
The inheritance tax is charged on the value transferred by the taxpayer from their estate.
This gift will result in a loss to their estate.
This invariably means that the estate of this taxpayer will be reduced as a result of this gift they have given when alive or dead.
The percentage on this loss could be either 20%, 25% or 40%
Do we all pay inheritance tax on all our assets?
Not all individuals in the UK are chargeable to inheritance tax.
Only individuals that are domiciled in the Uk are chargeable to inheritance tax on all their worldwide assets.
For individuals that are not domiciled in the UK, they only
pay inheritance tax on the transfer of value of assets in the UK.
What does it mean to be domiciled in the UK?
There are 3 main types of domicile in the UK.
Domicile of origin: This domicile is acquired by taxpayers when they are born.
This is usually the domicile of their father at the time of birth, however, if the parents were not married at the time of birth they acquire the domicile of their mother.
This is usually assessed by the county where the father/mother permanently reside.
Domicile of dependence: For children under the age of 16, they are dependent on their parents so therefore they acquire domicile of dependency.
Domicile of Choice: When an individual reached the age of 16, they may choose to acquire a new domicile of their choice.
To be able to prove the new choice they must be able to prove some certain conditions.
Conditions such as Living in the new domicile country for the rest of their life.
They must be settled permanently in the country of their new choice.
Usually, they also must be able to prove they have broken all their ties in the country of domicile.
Do we have to pay inheritance tax on all the transfers of value on our gifts?
Some gifts are specifically exempted from inheritance tax.
- Before a gift must be charged to IHT, the giver must deliberately and genuinely intend to give a gift to the person.
- When an individual gives a gift that is for the maintenance of their family.
- When a taxpayer gives up receiving salary or dividend from their employer.
What are the three types of transfer for IHT?
Chargeable life transfer: Typical example of chargeable life transfers are gifts made into trusts.
Exempt transfer: Typical example of exempt transfer are
- Gifts to spouse /civil partners.
- Gifts to UK and EEA charities.
- Lifetime small gift not costing more than £250.
- Lifetime gifts are given for reasons of marriage: The gift must not be more than £5000 if immediately
Potentially exempted transfer:
These are gifts given by donor whilst alive, these gifts would be exempted from tax if the donor lives more than 7 years.
There will also be a relief if the owner of the gift lives for more than 3 years.
There will be 20 % relief for each year he lives up to the 7th year.
What you should do if affected by inheritance tax?
Planning is the key to saving tax even after our death.
If you would like to enjoy 30 mins of a free consultation, to give you guidance on planning ahead, Kindly click on to contact us.