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largest, and usually the most valuable, asset that many of us will
own is our property. A lack of understanding of the current inheritance
tax (IHT) rules has led to an increasing number of people who die
each year potentially leaving even more to the taxman than in the
past. To give you an overview of the rules, we have provided below
some answers to a selection of the most commonly asked questions
we receive from clients. |
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Your
questions answered
Q: What is the nil rate band?
A: When you die, the Inland Revenue will add up the value of your
assets. In the current tax year (2004/05), if your assets plus
chargeable gifts made in the previous seven years amount to £263,000
or less, your family does not have to pay any inheritance tax
on them. This is known as the ‘nil rate band’. If
your assets exceed £263,000, IHT at 40% is due on everything
over this threshold.
Q: What are potentially exempt transfers (PETs)?
A: These are gifts you make during your lifetime. They are potentially
exempt (from inheritance tax) because if you survive for seven
years after making them, they pass outside your estate and no
IHT is due.
Q: Is IHT payable on transfers between
husband and wife?
A: No IHT is payable on assets that pass between a husband and
wife unless the donee spouse is not UK domiciled and the donor
spouse is UK domiciled, in which case exempt gifts are restricted
to £55,000.
Q: What are the implications of taper relief?
A: If you make a gift which exceeds the nil-rate band and subsequently
die between three and seven years of making a gift (PET), taper
relief will be applied to the amount which exceeded the nil-rate
band. This means that your estate will not have to pay the full
rate of IHT, if any, on that part. The earlier the gift is made,
the less tax will be due.
Q: Who is the settlor?
A: This is the person who has given something away through a trust.
Q: What is a gift with reservation?
A: If you give away an asset during your lifetime, but you can
potentially benefit from the asset without paying full value for
the benefit received, it is called a ‘gift with reservation’.
This applies to any asset you continue to benefit from, or that
you can ask to be returned if necessary.
If you would like to discuss provision to mitigate inheritance
tax, please e-mail or contact us for an independent assessment
of your personal situation.
The Financial Services Authority
does not regulate taxation advice, trusts and some aspects of
protection.
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