Tax Allowances 2009 – Tax Rates 2009

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The start of the new tax year yesterday signalled changes in some of the main tax rates, reliefs and allowances and summarised below are the main rates, reliefs and allowances based on our own research: –

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Capital Gains Tax

No change to personal allowance for Capital Gains Tax – remains at £9,600 for the 2009/2010 tax year

Note:

Tax allowances, rates and reliefs are subject to change. These figures are for guidance only and are correct to the best of our knowledge at the date of publication. Please check the HMRC website for current rates before making tax planning decisions.

Inheritance Tax – allowances and reliefs

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In this second part of a three part series we will consider the main allowances and reliefs which can be used to reduce your liability to Inheritance Tax.

Nil Rate Band

This is the main relief which most people enjoy. The Nil Rate Band currently stands at £325,000  – on the first £325,000 of your net taxable estate IHT is payable at 0% – hence the name “Nil Rate Band”.

In the previous article we discussed that recent changes in legislation entitled a married couple to pass on any proportion of unused Nil Rate Band to the surviving spouse on first death.

(Please note – the Nil Rate Band has been updated for the 2009/2010 tax year which commenced on 6th April 2009 – Simon)

Inter-Spousal Exemption

Under this exemption, all transfers between spouses and civil partners, as long as they have a permanent home in the UK, are exempt from Inheritance Tax.

The exception to this rule is when a UK domiciled individual is married to a non-UK domiciled individual – in this case, any transfer from the UK domicile to the non-UK domicile receives IHT relief on the first £55,000 transferred only.

Exempt Gifts

Certain gifts are exempt from IHT, regardless of whether they are made during the donor’s lifetime or as a result of a gift through their Will on death: –

  • Gifts between husband, wife and civil partners
  • UK Charities – here is a list
  • Some national institutions such as museums, universities or into the National Trust
  • UK political parties

Annual Exemption

Any individual can make a gift of up to £3,000 in any tax year which is free from Inheritance Tax. Any unused relief can be carried forward for just one tax year.

Other Gifts

Some gifts made during lifetime are exempt from Inheritance Tax and they are detailed below:-

Gifts on marriage or entering a Civil Partnership

  • Parents can each give £5,000 cash or gifts
  • Grandparents and other relatives can give cash or gifts up to £2,500
  • Anyone else can give cash or gifts up to £1,000

Small Gifts Exemption

Any individual can make a gift during lifetime to any other individual up to £250 and not be liable to Inheritance Tax.

Gifts out of Normal Expenditure

Any regular gifts made out of net income (i.e. after tax has been paid) are free from Inheritance Tax. These can include regular gifts to someone – e.g. christmas presents, premiums on a life insurance policy or other regular or monthly payments to another person.

In order for this relief to work, the gift must be made out of normal expenditure and not be so high as to affect the donor’s standard of living in that they have to access their own capital to make good any shortfall in maintaining their standard of living.

Potentially Exempt Transfer – the Seven Year rule

Any gifts made to individuals will be exempt as long as there is a period of seven years between the date of the gift and the date of death.

If you die within seven years, and the value of the gifts exceeds the nil rate band, then IHT may be due on the gift. It would be the recipient’s responsibility to pay the IHT due on this gift.

If the value of the gifts is in excess of the Nil Rate band then “taper relief” may apply. HMRC give more information on taper relief here.

Gifts for Maintenance of the Family

Any lifetime gift for the maintenance of the spouse, child or a dependent relative may be exempt from tax as long as the gift is used for maintenance, education or training up to the age of 18, or to the end of full-time education if this is at a later date.

Other Reliefs – to be covered later

Other reliefs are available in respect of businesses, woodland, heritage and farmland – these reliefs will be covered in more depth at a later date.

Note

As with any issue relating to taxation, rules can and do change on a regular basis. Please ensure you take advice from a suitably qualified accountant or solicitor in respect of Inheritance Tax and the allowances and reliefs your own personal estate may enjoy.

Inheritance Tax – an introduction

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In the first of a three part series we will consider Inheritance Tax – a tax previously deemed to be paid by “those who trust their heirs less than they trust the government”!

In part one we will consider what the tax is, how much is payable and the situation facing married couples.

What is Inheritance Tax?

Inheritance Tax is a tax payable on the value of your estate following death, and some gifts made within the 7 year period prior to your death – the tax is payable on the value of your net estate – all assets less all liabilities after certain reliefs and allowances have been made.

On what Assets is it Payable?

When considering Inheritance Tax we need to consider the domicile of the individual who has died. Domicile is a legal concept which explains a person’s true home and there are various factors affecting it. It is a complex legal subject which is beyond the scope of this article.

Generally, if you were born to UK parents, then that is your domicile and the liability to inheritance tax is payable on the value of ALL your assets, regardless of where in the world they are situated.

If you are non-UK domiciled, i.e. you moved to the UK recently, then liability to inheritance tax is calculated with reference to your UK assets only.

The tax is payable within 6 months of death and it is the duty of the Executors of your Estate to complete and file a probate form. If the tax is not paid within the 6 month window then interest will start to be charged on the amount outstanding.

How much is Payable?

Inheritance Tax is payable at the rate of 0% on the first £325,000 in the current 2009/10 tax year, with tax at a rate of 40% payable on the value of your estate in excess of this “nil rate band”.

So for example, if your net estate is valued at say £500,000 the liability to Inheritance Tax after your death would be £70,000 (£500,000 minus £325,000 at 40% taxation).

What about for Married Couples? Didn’t the rules change for them recently?

Fortunately, the law as it stands allows for all transfers between spouses to be made with no immediate liability to inheritance tax. In these circumstances Inheritance Tax is payable on second death.

There is an exception to this rule though, and that considers the situation where a domiciled individual is married to a non-domiciled individual. If the domiciled individual dies first, the transfer to the non-domiciled widow(er) is tax-free up to £55,000. Over £55,000 inheritance tax is payable.

Since October 2007, both married couples and registered civil partners have been able to raise the threshold on their joint estates on second death by effectively transferring any unused nil rate band (personal allowance) from the estate on first death to the estate on second death.

It is important to remember that on first death, the transfer of estate from the deceased to the widow(er) is exempt from Inheritance Tax, so 100% of their personal “nil rate band” allowance can be passed along for use on second death.

Also remember, it is the percentage of unused allowance, not the value of unused allowance that is passed on to the second estate.

For example, say John dies in 2008 leaving £500,000 to his wife, but also leaving £156,000 to his son. The transfer to his wife would be free of Inheritance Tax as it is an inter-spousal transfer, and the amount left to his son would also be free of Inheritance Tax as it falls within John’s nil rate band, which is £312,000 in that tax year.

In this example, John has used 50% of his nil rate band allowance and therefore, on second death, the estate can be reduced by applying 100% of John’s widows’ nil rate band PLUS 50% passed along following John’s death. So in effect, on second death, the estate benefits from 150% of whatever the Nil Rate band is at that time!

Inheritance Tax is a complicated subject and every person’s circumstances are different – it is vitally important that you take advice from a suitable qualified solicitor or accountant before putting in place any plans to reduce your inheritance tax liability.

In the next section, we will consider the various rates and allowances which can be used to reduce the Inheritance Tax bill. The final section will outline the various methods by which the Inheritance Tax liability can be mitigated.