Credits Against Inheritance Tax: An Overview
Inheritance tax is a tax imposed on the transfer of assets (property, money, stocks, etc) after an individual’s death. The tax law in different countries imposes inheritance tax at varying rates and on different levels of value. In the United Kingdom, inheritance tax is imposed at a flat rate of 40% on the value of an individual’s estate that exceeds a certain amount – currently, £325,000. This can be a significant burden on those who wish to leave their assets to the next generation. Credits against inheritance tax offer one method of reducing or eliminating the amount of tax owed on an estate.
What are Credits Against Inheritance Tax?
Credits against inheritance tax are deductions that can be claimed against the total estate value when calculating the amount of inheritance tax owed. These credits can be single or cumulative and can include everything from exemptions for specific inherited assets to tax credits for charitable donations.
The most significant type of credits against inheritance tax in the UK is the Nil Rate Band (NRB) credit. The NRB is the amount of an estate that is exempt from inheritance tax. Every person is entitled to a NRB of £325,000. However, married couples and civil partners can combine their NRBs so that up to £650,000 of their combined estate is tax-free at the time of transfer.
In addition to the NRB, there are several other credits that can be applied to an estate to reduce the amount of inheritance tax owed.
Gifts Out of Income: A Credit Against Inheritance Tax
One of the most popular credits against inheritance tax is a credit for gifts out of income. This credit allows individuals to leave regular, planned gifts to family members or other beneficiaries without incurring inheritance tax. For the gift to qualify as out of income, it must be:
– part of a regular pattern of giving,
– made out of income, and
– not affect the giver’s standard of living.
This credit is popular with those who have a significant income but who also want to ensure that their loved ones benefit from their assets after their death. Gifts out of income are exempt from inheritance tax when they meet the criteria outlined above.
Business Property Relief
Another credit against inheritance tax in the UK is Business Property Relief (BPR). BPR is available on the transfer of a business or business property and can offer significant savings on inheritance tax. BPR is offered at two rates, 50% and 100%, depending on the type of property transferred.
Certain assets do not qualify for BPR, including holdings in offshore companies, investment portfolios, and bare land.
Agricultural Property Relief
Similar to BPR, Agricultural Property Relief (APR) provides credits against inheritance tax on the transfer of agricultural property. In the UK, APR is offered at two rates, 100% and 50%, depending on the classification of the property.
To be eligible for APR, the property must have been used for agricultural purposes for at least two years before the transfer and must continue to be used for agricultural purposes after the transfer.
The Benefits of Using Credits Against Inheritance Tax
Using credits against inheritance tax can significantly reduce the amount of tax owed on an estate. By taking advantage of the NRB, BPR, APR, and other credits, individuals can prevent their estate from being subject to high rates of tax.
Credits against inheritance tax can also help reduce potential family disputes as they can prevent the unnecessary sale of inherited assets to cover taxes. This can be particularly important when dealing with businesses or farms that have been passed down through generations.
Individuals who take advantage of the credits offered by the UK tax system can also leave a more significant legacy to their loved ones.
The Downsides of Using Credits Against Inheritance Tax
There are some downsides to using credits against inheritance tax. For example, to use some of the credits against inheritance tax, individuals must meet certain conditions. For instance, they must ensure they plan their estate effectively to ensure they are eligible for the tax credits offered.
Gifts out of income, for instance, must be made regularly and without affecting the standard of living of the giver. This type of credit can be complex to apply for, and the criteria must be met consistently.
Business property relief and agricultural property relief are subject to specific criteria, and not all assets qualify for relief. It is essential that individuals seek professional financial advice to ensure they are eligible for the credits they plan to use when planning their estate.
Conclusion
Credits against inheritance tax offer individuals a way to reduce or eliminate the amount of tax owed on their estate. In the UK, credits such as the Nil Rate Band, Business Property Relief, and Agricultural Property Relief can be used to great effect.
Proper planning is essential to ensure the successful application of credits against inheritance tax. Individuals should seek professional financial advice to determine which credits are available to them and to ensure they meet all the criteria required.
By taking advantage of the credits offered, individuals can ensure that their assets benefit their loved ones rather than being subject to high rates of inheritance tax.
Due to inheritance tax law, the federal inheritance tax rate will change in 2011. However, the federal inheritance tax rate will still allow estates to take credits against inheritance or the value of an estate. One such credit is an allowance for benefactors to leave property or money of a certain value, to be passed to heirs tax free.
The Unified Gift and Estate Tax Rates, allow family members to both gift and bequeath property of a certain value tax free. Inheritance tax law allows parents to leave their children one million dollars tax free beginning in 2011. They are also allowed to gift one million dollars to heirs, tax free in their lifetime. Money inherited in the 2010 tax year is currently tax free, unless next years federal inheritance tax rate is applied retroactive.
There are several credits against inheritance tax which are allowable according to inheritance tax law. In some circumstance, money or property that has already been inherited in the last ten years, and incurred an inheritance tax, can be exempt from further inheritance tax. In other words, the same property inherited more than once in ten years, only incurs the Federal inheritance tax rate the first time that property is inherited.
In 2011 the maximum estate tax credit for heirs is set to be one million dollars with an additional maximum lifetime gift tax credit of one million dollars, unless Congress acts before the sunset clause goes into effect on January 1, 2011. That means that parents may gift one million dollars to a child during their life, tax free, in addition to allowing the child to inherit up to one million dollars tax free. Due to an inheritance credit, that child could then bequeath that money to another individual tax free, if they should pass away in the proceeding ten years.
Inheritance tax law will be changing within the next year. Their is a freeze on the federal inheritance tax rate at zero,for the year 2010. However, once the new tax year begins, federal inheritance tax rates are set to revert back to those that existed in 2001.
As it stands now, the laws, including credits, are set to revert back to those that existed in 2001 lowering exemption, deductions and credits which increases tax burdens. Those laws actually lower the maximum exemption from 2009 and the amounts that could be bequeathed to heirs tax free. Unless Congress acts soon, many credits will be lowered, thereby increasing the federal inheritance tax rate and greatly altering other inheritance tax laws.
