When Inheritance Tax (IHT) was introduced approximately 30 years ago and broadly charges to tax certain lifetime gifts of capital and estates on death.

With (IHT) came the concept of `potentially exempt transfers` (PETS) make a lifetime gift of capital to an individual and, so long as you live for seven years after making the gift, there can be no possible IHT charge on it whatever the value of the gift. The rules create uncertainty until the seven-year period has elapsed but, simultaneously, the opportunity to pass significant capital value down the generations without an IHT charge.

Gifting the family home

What is to stop a family home from being made to say, your (adult) children whilst you continue to live in it? The answer is simple: nothing! However, such a course of actions is unattractive not to say foolhardy for many reasons the most significant being:

  • security of tenure may become a problem
  • loss of main residence exemption for capital gains tax purposes
  • it doesn’t actually work for IHT purposes

Such a gift doesn’t work for IHT because the ‘gift with reservation (GWR) rules deem the property to continue to form part of your estate because you continue to benefit from it by living there. This is a complex area so do get in touch if you would like some advice.

Getting around the rules.

To get around the GWR rules a variety of complex schemes have been developed, the most common being the ‘home loan’ or ‘double trust’ scheme, which allowed continued occupation of the family home whilst removing it from the IHT estate. for an individual with a family home worth £500,000 the prospect of an ultimate IHT saving of £200,000 (being £500,000 x 40%) was an attractive one.

How much can you inherit without paying inheritance tax?

You can pass on your estate free from tax if it is worth less than £325,000, plus an additional £175,000 if you are passing on your main residence to your direct descendants.

You will not have to pay tax on inheritance if you are the person’s spouse or civil partner.

What is the nil-rate bank/personal allowance? 

The nil-rate bank is the amount of money you can leave to family and loved ones free from tax, currently, IHT is payable where you leave an estate with a value of over £325,000.

How is inheritance tax calculated?

Calculating the bill involves adding up everything, the deceased person owned or was owed, including by their insurance policy, then deducting all their debts.

Then, the IHT allowance is deducted, including if the person has received their spouse or partner’s unused allowance and any additional residential allowance. Then any gifts made in the last seven years are considered.

How much is inheritance tax?

The current rate of inheritance tax is 40% of the value of your estate over the NIL rate bane or personal allowance, however, the inheritance tax charge is reduced to 36% if you are donating over 10% of your estate to charity in your will.