IHT explaining the basics

Inheritance Tax (IHT) is commonly understood as the tax paid on an estate when an individual dies. However, it can also apply to certain lifetime transfers and there is a separate regime that applies to assets held in certain types of trust. 

A trust is a legal arrangement where one or more “trustees” are made legally responsible for holding assets (for example land, money, buildings, or other investments) that have been placed (“settled”) in trust for the benefit of one or more “beneficiaries”. 

There are three main occasions when IHT may be charged on arrangements involving most types of trust: when an individual settles assets in a trust, an IHT charge, commonly referred to as an ’entry charge’, is levied. Tax is charged at a rate of 20% on the chargeable value of the assets transferred into trust that is in excess of the IHT nil-rate band, when a trust reaches each ten-year anniversary from when it was set up a periodic charge is levied. This can be up to 6% of the chargeable value of the property in the trust, and when assets are transferred out of a trust, or the trust comes to an end an exit charge effectively ensures that a proportionate IHT charge is imposed on assets that would not be subject to tax at the next periodic charge. 

Sorting out some of the implications of trusts and IHT can be confusing and complicated which is why you might want to turn to experienced IFAs like those at Enable of Bishops Stortford.

Poor inheritance tax costs the UK taxpayer billions

A recent report reveals that UK taxpayers will pay £1.3bn this year 'due to poor inheritance tax (IHT) planning'. 'With the IHT threshold frozen for another three years, it is important to make sure your financial affairs are in order to protect your loved ones after you’ve gone. Enables Independent Financial advisors are here to help every step of the way.  There are 5 main ways to manage your Inheritance tax liability.  Enable will look at the options in more detail over the next few weeks.

1. Claim a partner’s unused IHT allowance
Married couples and Civil Partners can boost their IHT-free allowance by claiming any ‘nil-rate band’ their deceased partner has not used.

2. Reduce your estate by making tax-free lifetime gifts
Gifts made during your lifetime can reduce the size of your estate substantially, but there is a limit to how much you can give away tax-free in a single year.

3. Reduce your estate by making potentially exempt transfers
Larger lifetime gifts may escape IHT but only if you live for seven years after making them. Known as potentially exempt transfers (PETs), they are added back into your estate if they ‘fail’.

4. Insure against inheritance tax
If you think your heirs might be faced with IHT, you can take out a whole of life insurance policy to cover the likely bill.

5. Make gifts to charity
Gifts to charity reduce the size of your taxable estate. From April 2012, they can also reduce the rate of IHT your heirs have to pay.

Inheritance Tax worries?

With our children living longer let alone our grandchildren Enable IFA’s of Bishops Stortford know we want to make the most of what we have to help them. Currently an individual can pass on an estate worth up to £325,000 without any inheritance tax applying. If an estate - including any assets held in trust and gifts made within seven years of death - is more than the threshold, inheritance tax will be due at 40% on the amount over the current £325,000 limit.

Gifts made to a child's pension however have the potential to qualify for a number of inheritance tax exemptions, including:

• Gifts of up to £3,000 each tax year are exempt from inheritance tax - making a gift of £2,880 (the maximum net pension contribution) to a child or grandchild's pension an ideal way of making use of this exemption


• Gifts of up to £250 to an individual in a tax year can qualify as inheritance tax exempt payments


• Regular gifts made from an individual's net income can qualify as inheritance tax exempt payments

If a parent or grandparent gifts any monies that are not covered by these exemptions IHT will only apply if the parent or grandparent dies within seven years of the gift being made.

By setting up a pension for a child, a parent or grandparent can help them on the road to a comfortable retirement and vitally may encourage the saving habit that their children will continue once they become an adult. Looking to the long term is something we as experience Independent Financial Advisors at Enable like to help with.