Inheritance Tax UK: One important IHT rule Britons should bear in mind | Personal Finance | Finance


Inheritance tax is currently set by the government at 40 percent, and is applicable to the value of an estate above a particular threshold. For most people, this threshold currently stands at £325,000, with estates above this value affected by the levy. There are, however, some instances in which IHT does not have to be paid.

If the value of a person’s estate is below the £325,000 threshold, then IHT does not come into the equation.

Additionally, if a person leaves everything above this threshold to a spouse, civil partner, charity or community amateur sports club, there is usually no tax bill to pay.

A threshold can be increased to £500,000, thus potentially reducing an Inheritance Tax bill, if a person gives away their home to their children or grandchildren.

At present, Inheritance Tax is not favoured by large swathes of people within the UK, some of whom refer to the levy as a “death tax”.

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This is because the seven year rule states: “People you give gifts to will be charged Inheritance Tax if you die away more than £325,000 in the seven years before your death.”

Gifting rules are likely to affect what people choose to do with their income before death, particularly if they wish to avoid a higher IHT bill.

Under current rules, there is a tapering relief system applicable to gifts given away before a person dies.

If there is Inheritance Tax to pay, it will be charged at 40 percent on gifts given in the three years before a person dies.

The tax then gradually decreases on a sliding scale.

Gifts given three to four years before death are taxed at 32 percent, with gifts handed over four to five years beforehand taxed at 24 percent.

This tax rate drops to 16 percent for gifts given away five to six years before a person dies.

It decreases again to eight percent for gifts given six to seven years before death, with IHT eliminated if the years between the gift and death climb to seven or more.

It is important to note smaller presents such as birthday or Christmas gifts are usually exempt from Inheritance Tax. 

The seven-year rule has often been considered as controlling income before death, and a parliamentary group has now set its sights on eliminating the rule altogether. 

The All-Party Parliamentary Group for Inheritance and Intergenerational Fairness was established in February 2019 and has discussed Inheritance Tax at length.

Under proposals submitted earlier in the year, the group wishes to overhaul some of the rules and loopholes currently in the system.

John Stevenson, the Conservative chair of the APPG said: “The huge complexity around how the tax is levied, and the reliefs available on it, leads to lots of confusion and a strong sense of injustice.

“The rich get away with not paying, and IHT is perceived as an unfair penalty on hard working savers. Our bold proposals for reform seek to address this unfairness by simplifying the system and ensuring that the higher value estates that currently take advantage of so many reliefs and exemptions actually pay some IHT.”

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