Given the continuing escalation of property prices in the UK and Ireland more and more people are likely to be faced with the possibility of inheritance tax being due on their estates. In 1977 the average UK house price was £13,400. In 1999 it was £100,000. Property prices increased substantially in 2002. When other assets such as savings and investments, stocks and shares are taken into account, many people who never perhaps even considered themselves particularly wealthy may have assets which will render their estate liable to inheritance tax on their death.
Estates worth more than £250,000 for the tax year 2002/2003 are potentially liable to inheritance tax at a flat rate of 40%. On an estate of £300,000 the inheritance tax would be £20,000. On an estate of £600,000 it would be £140,000. Before a person's estate can be legally distributed, inheritance tax due must first be paid to the Inland Revenue, normally within six months of death. Although it is possible to elect to pay the tax on land and property including the family home by instalments, any outstanding inheritance tax must be paid in full on the subsequent sale of such assets. Also, inheritance tax bills payable by instalments will also normally have interest at 3% per annum added to the outstanding amount.
Often a loan has to be raised to pay the tax because any tax due must be paid before the estate can be legally distributed. This means that initially most of a person's assets cannot be sold or realised to raise the money needed to pay the inheritance tax bill.
Reducing Inheritance Tax Liability There are a number of ways to reduce liability for inheritance tax. Examples of these are as follows:
Gifts made within seven years preceding death. Most gifts not covered by the sort of exemptions listed below qualify as what are called Potentially Exempt Transfers i.e. if the donor survives seven years it will not form part of the estate. If the donor however dies within seven years, then the original value of the gift will still be included in the estate for tax purposes.
Common exemptions to inheritance tax liability are as follows:
• Gifts to charities and political parties.
• Marriage gift to son or daughter £5,000.
• Marriage gift to grandchild £2,500.
• Marriage gift to others £1,000.
• Annual exemptions £3,000 per donor for tax year.
• Small gift exemption £250 to any number of donees.
• Normal expenditure out of income.
• Transfers between spouses.
Tax can also potentially be saved by the making of a tax efficient Will and often this can be done by a solicitor in conjunction with a financial advisor.
Campbell Fitzpatrick solicitors would encourage all clients to make Wills and especially those whose estates may be liable to inheritance tax. There are a number of ways of potentially reducing the tax burden of which we can advise our clients when they consult us.
Private consultations on these matters are available at both our offices for the convenience of our clients.