UK Fact-File Part 4:
Individual Business Tax-Efficient Structures

4.5 UK Personal Estate and Inheritance Planning

Inheritance Tax is paid on an estate when someone dies, and on certain pre-death transfers (where the transfer is made within 7 years of the transferor’s death) and transfers of assets to certain trusts. For estates valued at less than GBP325,000 (in 2010/11), there is no liability for Inheritance Tax.

Married couples (and civil partnerships) can increase the threshold for the tax when the second partner dies, to as much as GBP650,000. This is achieved by transferring the unused Inheritance Tax threshold to the second spouse or partner in the event of their death – the executor of the estate would normally do this.

Normally, the executor or personal representative of a deceased person would pay the Inheritance Tax on the assets of the deceased’s estate that are not held in trust. The tax must be paid within six months of the person’s death. The executor or personal representative may have to pay the tax and later claim this back from the estate – this can occur where assets are tied up in property that has to be sold to realise the cash value of the deceased’s estate. The tax must be paid before probate will be granted. Interest is charged on late payment of Inheritance Tax and the rate varies with market rates – from September, 2009 the rate has been 3%.

One way of potentially minimising liability to Inheritance Tax is to put assets into a trust. This is a complex area of tax law and individuals should seek legal advice from relevant professionals if considering setting up a trust – seeking to ‘hide’ assets from the tax-man is not advisable, and it is important that any such vehicle is properly structured.

For the purposes of the legal definition of ‘relevant property’ that can be included in a trust, these include money, shares, house, land or other assets. A tax charge will be liable when an asset is transferred out of the trust (known as exit charges) and on the tenth anniversary of the trust. There are some exceptions, notably where assets have been put into 'interest in possession' trusts before 22nd March, 2006 – in such cases there is no tenth anniversary charge. Offshore trusts could also be useful in terms of asset protection.

There are a number of exemptions to Inheritance Tax liability. The main exemptions are:

• Gifts to a spouse or civil partner, as long as the recipient has a permanent residence in the UK;
• Gifts to UK charities;
• Gifts to certain national institutions (eg museums and the National Trust);
• Donations to a UK political party which has at least two elected Members of Parliament and where the party has received at least 150,000 votes;
• Annual exemption of gifts worth up to GBP3,000 in any tax year – the exemption limit can be carried forward to the next year only.

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