Inheritance tax: plan and minimise your liabilityPosted on: 09 March 2011 by Gareth Hargreaves
Your estate is liable for tax if it totals £325,000 at the time of your death. Plan ahead and ensure you choose who benefits.
Inheritance tax (IHT) is unpopular – full stop. The people of the baby boomer generation have paid tax all their lives; they have paid tax for their council services; they paid tax on their earnings and the purchases they made with their earnings. It is hard to see why an estate, the content of which has already been plundered by the tax man, should not be given over to the people and causes they have chosen without further revenue being siphoned off.
This, unfortunately, is what can happen if you fail to plan your financial affairs fully - and the main beneficiary after your death could be Her Majesty's Treasury.
With rises in property prices, many people have been pushed over the £325,000 inheritance tax threshold (Nil Rate Band), yet too few are aware of the implications this could have - until faced with a tax bill for 40 percent of the value of the estate. One means of lessening your liability to IHT is to dispose of your assets via gifts to family or charities and campaigns you support. In order to do this effectively you must plan...
Inheritance tax planning
The way you want your wealth distributed is best served by having a valid Will. Leaving your beneficiaries to deal with inheritance tax issues while still grieving is both upsetting and stressful and while a Deed of Variation can assist redistribution of your assets, this is far less effective than planning ahead. Knowing your liability and making changes in advance is recommended.
Reduce estate value below the Nil Rate Band
The current inheritance tax threshold is £325,000 - anything above is taxed at 40 percent. If your total assets fall below the threshold there is no IHT to pay. If you are widowed, you can transfer your late spouse's Nil Rate Band, to as much as £650,000, depending on the circumstances.
Trusts and your wealth
Take independent financial advice on the various types of trusts that can be structured to minimise IHT liability.
Putting your money in a trust can keep it outside your estate and therefore be free of inheritance tax. This is because some trusts qualify as Potentially Exempt Transfers and therefore are subject to the seven year rule for PETs. Different types of trust are available, which provide different levels of access to that money.
Equity Release plans
If your wealth is tied up in property, you may not be able to take advantage of gift allowances. However, an equity release plan (also known as lifetime mortgage, home income plan or home reversion scheme) releases the capital by purchasing a percentage of your house - to be recouped after death. By taking the capital out of your home you could enjoy money and gift it to relatives, reducing your exposure to IHT. For example, if you sell 50 percent of your house to an equity release company - it recoups that cost after your death from the sale of the property, the remainder will be passed on to your heirs as identified in your Will. This option however needs careful planning and it is recomended you speak with an independent financial adviser who can help you better weigh your options.
Paying an IHT bill
Inheritance tax must be paid within six months of death. It is possible to use a life insurance plan written in trust, which will pay out when you die, this would ensure their is sufficient cash for your executors to pay the IHT. Payments into a policy will be exempt from IHT.
Gifts and inheritance tax:
There are a several allowances for gifts made during your lifetime ...
You can give away up to £3000 in any one year (reducing your estate’s value) without paying IHT. If not used, you can backdate this one tax year and give £6000.
Small gift exemption
You can give small gifts up to £250 as often as you like in the tax year, provided they are to different people. If you give more than £250 to one person in the tax year then this must be deducted from the annual exemption.
Regular gifts out of income
Regular gifts out of surplus income, as opposed to capital, are exempt from inheritance tax. This allowance can enable quite large sums to be gifted and therefore reduce the value of your estate. It would be wise to record accounts of your gifting as this will help your executor or personal representative to sort out your financial affairs when you die. And it's worth noting that these gifts are only tax free if you live for seven years after making the gift.
Wedding gifts are subject to IHT allowance. You can give up to £5000 to each of your children – provided the gift is made before the wedding. Wedding allowance is transferable to grandchildren (up to £2500 per grandchild) and friends (up to £1000).
You can make gifts using two allowances, ie a wedding gift to your child (£5000) plus £3000 from Annual exemption.
Ways you can leave gifts to charity in your Will
You can further reduce your inheritance tax liability, by choosing to give money to charity in the form of a legacy gift. There are a number of different options:
This is a gift of the remainder or percentage of your estate after all other legacies have been made and debts cleared.
Residuary legacies keep up with inflation and are an effective way to divide the value of an estate between a number of people and causes that are important to you.
If you are considering what type of legacy, a residuary legacy can help your gift go further.
A gift of a fixed sum of money. The value of pecuniary legacies will decrease over time, as the cost of living increases.
A particular named item left as a gift in your Will is known as a specific legacy, for example, a piece of jewellery.
Legacies made on the basis of another event happening first are called contingent gifts. For example your Will could state that a gift only applies if all other beneficiaries named in your Will die before you do.
Life interest or reversionary legacy
This is a gift which someone can benefit from in their lifetime. For instance, your house could be left for the use of a relative. When they die it could pass to someone else, or to a charity.
Legacy gift choices are your will, or by a declaration to the executors or personal representatives giving instructions as to how you would like your legacy to be distributed. If you are leaving money to charity, make it clear exactly which charity you want to receive the gift and include its registered charity number.
Gifts made to a charity or CASC in the seven years before your death are exempt from inheritance tax.
Find out more about inheritance tax
Find out more about gifts that are exempt from inheritance tax
What to do next
Raising inheritance tax threshold to £1million was a Conservative party election promise that has now been mothballed until at least 2015. This delay highlights the importance of understanding your true wealth. Here is a quick round up of the steps you need to take to reduce your IHT liability.
Understand your financial position and assess your IHT liability
Look at how you can reduce your estate value through lifetime or charitable gifts
Take advantage of the annual or other IHT exemptions and reliefs
Look into the benefits of setting up a trust
Write a Will and keep it up to date.
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