In the UK, individuals who wish to pass on their assets, on or before death, or gift them to others may be subject to payment of inheritance tax. Donors receive an allowance of £325,000 when gifting or passing on assets to the desired parties with all transfers underneath this threshold not being subject to any inheritance tax. Albeit estates valued underneath £325,000 which are transferred will still need to be reported to HMRC.

Inheritance tax liabilities might also be negligible if the transfer is made above the threshold but the beneficiary is the donor’s wife, civil partner, a charity or community amateur sports club. Similar familial generosity extends to transfers of estate ownership to children or grandchildren (including adopted, foster or stepchildren) whereby the threshold can be lifted to half a million £s. Additionally, HMRC permits partners whose estates are worth less than their threshold at the time of death to top up their spouse or civil partner’s threshold by the unused value of the donors threshold.

The UK is amongst few ,7 to be precise, countries such as the US and Ireland which levy a flat rate of inheritance tax which is held at 40% across England, Wales and Scotland. The Irish rate stands at 33% whilst Portugal charges an abnormally low rate of 10%. But what distinguishes the UK from most of the OECD countries is perhaps the fact that inheritance tax isn’t levied on beneficiaries but estates of the donor instead.

Suppose an individual’s estate is valued at £1 million which is considerably in excess of the £325k allowance. The inheritance tax which the individuals would be liable to pay, assuming its not transferred to the spouse or child, would be £270,000[40%*(1,000,000-325,000)]. This would be carried out by the executor(s) of the will who are expected to make the payment within 6 months following death of the donor, following which HMRC would commence charging interest if the tax remains unpaid. There is the option to arrange a payment plan with HMRC to enable payments to be made in instalments over, say, a decade but this would still incur interest.

Gifts are another area of interest for inheritance tax purposes. Gifting trivial or common items annually doesn’t usually have a material impact on inheritance tax since individuals are given what HMRC terms as an “annual exemption” of £3000 each tax year. Any unused element of the annual exemption can also be carried forward to the following year but this is limited to one year. In other words, any unused exemption from two or more years prior to the tax year in question, cannot be brought forward to that tax year.

Gifts provided above this annual exemption qualify for inheritance tax purposes and will affect the £325000 threshold which is primarily for the purposes of transfers of estates. Hence if one were to transfer their estate valued at £300,000 but also gifted items valued at £100,000 on or up to 3 years prior to death, the inheritance tax liability would amount to £30,000[40%*(400,000-325,000)].

But perhaps the most interesting, arguably controversial, aspect about inheritance taxes is what many have come to know as the 7-year rule. Gifts given more between 3 to 7 years prior to an individual’s death qualify for what is known as a “taper relief”. Whilst HMRC has published the respective inheritance tax rates which would be charged depending upon the number of years between the gift being made and death, gifts given at least 7 years before death are exempt from inheritance tax altogether.

For the latest tax advice and accounting support, call or book a meeting with Cheylesmore Accountants to steer clear of fines and penalties whilst having an up-to-date team of accountants handle all your business affairs promptly and in an efficient manner. This allows you to focus more on what matters more to you, whether this is developing your business or achieving a better work-life balance.