Giving is not just for Christmas

Published on Friday 27 March 2009 20:00

EACH week The Scotsman gives you a top ten guide to pertinent financial issues. As the end of the tax year nears many people are reviewing where they stand on inheritance tax. Neil Whyte, tax partner at PKF in Edinburgh, offers his top tips on avoiding leaving a big IHT bill.

1 HOW DOES IT WORK? Inheritance tax (IHT) is a tax on certain lifetime gifts and on the value of your estate when you die. A person's estate typically includes all of the property that belongs to them, including some interests under trusts and, on death, they are treated as if they had made a gift of all of this property the moment before they died.

The rules exclude some increases that arise on death but takes others into account. For example, life insurance funds not written in trust are included as part of the estate but the value of any annuities ceasing on death are ignored.

2 IS THERE A TAX-FREE AMOUNT? By charging the first tranche of your estate at 0 per cent (the nil rate band is 312,000 for deaths in 2008-9 and 325,000 for 2009-10) the rules effectively give each person an exemption limit, above which tax is 40 per cent. This exemption can also be passed on to a surviving spouse or civil partner in some circumstances.

3 LIFETIME TAX The tax is also payable on "chargeable lifetime transfers", such as transfers to trusts that exceed the available nil band, companies under the control of five or fewer people and some transfers made by such companies.

4 HOW MUCH ARE YOU WORTH? You are worth the combined value of your property, assets, cash and investments at the time of your death. The general rule for IHT is that property is valued at its open market value. Special rules apply in relation to the valuation of quoted securities and certain other property.

5 OVERSEAS CONNECTIONS Even if you have retained a foreign domicile for other UK tax purposes, you will be deemed as domiciled in the UK if you have been resident there during 17 out of the last 20 tax years. This may mean you become potentially liable to IHT on your worldwide assets after living in the UK for just over 15 complete years. However, it is possible to keep your overseas assets outside your UK estate if you act before you acquire UK domicile status.

6 WHERE THERE'S A WILL...The UK does not have heirship rules dictating which family members must inherit your UK assets when you die, so there is considerable flexibility in passing your assets down to the next generation.

It is vital to make the best use of the nil rate band and all the exemptions available. It is particularly important that married couples and civil partners use wills wisely to pass assets to the next generation as tax-efficiently as possible.

7 DEBTS Liabilities can reduce the value of the property held in a person's estate. Restrictions are only taken into account to the extent that consideration in money or money's worth was given for them.

8 GIVING IT AWAY Gifts to a spouse or civil partner domiciled in the UK are IHT-exempt, as are gifts to charities and political parties. There is also an exemption for small gifts up to an annual value of 250 per person. Other gifts up to a total of 3,000 a tax year are exempt and you can also use any unused part of this exemption from the prior tax year. There are additional exemptions for marriage gifts – parents can give 5,000 each, grandparents 2,500 each, others 1,000 each.

There are also exemptions for gifts considered to be for national purposes, as well as transfers made to qualifying housing associations and those made to certain employee trusts.

9 THE SEVEN-YEAR GIFT RULE Gifts to individuals not covered by an exemption will not trigger a tax charge unless you die within seven years. If you were to die within seven years of making such a gift, the IHT payable on the gift is reduced on a sliding scale. However, a gift to a trust may trigger a lifetime charge if the value exceeds the amount of nil band available at that time.

10 CONDITIONAL GIFTING A "gift with reservation of benefit" occurs where a donor has made a gift subject to conditions, or where they do not give up use of the asset gifted, on or after 18 March 1986. Where these rules apply, the property will be taxed as if it was included in the donor's estate at its value at the time of his or her death.

&#149 These rules are inordinately complex, and it is vital to take professional advice when making all but the most simple of gifts.