Inheritance Tax (IHT) receipts received by HMRC increased to over £2.7billion in the tax year to April 2011, a rise of 14% on 2010.
So why do so many pay? It’s fair to say a larger estates will attract a tax bill unless you take proactive action and for this it is normal to need professional advice. For many families, they could quite possibly eliminate or limit Inheritance Tax with some preparation and professional advice.
The administration of an estate for Inheritance Tax has been simplified, which allows for effective and appropriate planning. Tax laws also allow wealth to be apportioned, or drip-fed to you family each year. You could make full use of your benefits, exemptions and allowances.
The Good News – if your estate (and this is assets owned worldwide for most of us) is below £325,000 for an individual (or £650,000 for a married couple or civil partnership), there is no inheritance tax to pay.
The Bad News – if your estate is above these thresholds, the excess will be subject to a 40% Inheritance Tax charge. For example, an estate worth £850,000 could see a tax bill of £80,000.
However, if you live for seven years after giving away money or assets, or give them to a spouse or civil partner, these gifts will avoid Inheritance Tax. You can enhance the situation by using some government back schemes, which attract 100% Inheritance Tax Relief after only 2 years, others that attract an immediate exemptions in part or full from Inheritance Tax.
Go Skiing and Spend More
SKI – Spend the Kids Inheritance. People are living longer, so it makes sense to use some of the available funds instead of giving it all away and there are ways to use trusts, which will be a gift out of the estate and retain an income from the trust, typically for life.
When you make capital gifts, once given it is gone and so make sure it is affordable both now and in the future. Don’t leave yourself financially vulnerable, be aware of Long Term Care funding issues, cost of future care, house modifications possibly, etc.
Gifts from Income – unlimited regular payments can be made from after-tax income, but you must maintain your normal lifestyle. This income could include part-time work, a pension, or interest from savings but this type of gifting needs to be documented, be payable out of spare income, paid on a regular basis and quantifiable. This exemption allies only to income and so you cannot make exempt regular payments if you make them from your capital.
Capital Gifts –
Annual Exemption – you can also give as much as £3,000 as a lump sum every year tax-free. So if you haven’t given away anything in Year 1, in Year 2 you can give the unused £3,000 allowance in the following year (so a total of £6,000). You can only carry back the benefit one year i.e. only once in consecutive years.
Small Gift Exemption – small amounts up to £250 can be made to any number of people within one tax year but these people need to exclude those you have paid over your annual exemption (assuming you used your full £3,000 allowance).
Inheritance Tax Planning Scheme’s may provide an income while reducing the size of your chargeable estate to inheritance tax.
Get Married
Transfers to a spouse or civil partner fall outside of the inheritance tax net, you can transfer assets between spouses without an Inheritance Tax charge. If you leave assets to your spouse or civil partner, this means they can bequeath up to £650,000 (their allowance of £325,000, plus yours) free of Inheritance Tax.
You can give tax-free gifts to a couple getting married: up to £5,000 from parents, £2,500 from grandparents and £1,000 from any one else. The gift must be promised before the ceremony, even if the payment is made many months later.
Give Bigger Gifts
High value direct transfers of money, investments or even antiques bequeathed before you die are known as ‘potentially exempt transfers’. They are exempt from IHT only if you live for seven years. But if you die within this period, these gifts will be taxed at their current value, not their value when you gave them away.
Inheritance Tax is a capital tax, so you could make gifts of capital into IHT Schemes. These can reduce the size of the associated IHT and some potentially provide an income for life. Schemes, such as Gift & Loan, Loan Trust Arrangement, Gift Trusts, Discounted Gift Plans, EIS Managed Portfolios, BPR Schemes, APR Schemes, etc.
Use Property
You can give away property and dodge inheritance tax if you meet the seven-year rule. Although, if you stay living there rent-free, the gift is classed as a ‘gift with reservation of benefit’ and is subject to IHT.
Seek legal advice when gifting property because it can be a costly mistake. For example, if given to a relative as their second home, the property may be liable for capital gains tax when sold in the future. This will be based on the difference between the price at the date the ownership was transferred and the value when it was sold.
What About Your Pension or Paying Into Someone Elses?
Depending on the particular pension scheme or plan, a number of benefits may be payable when you die, including:
- a return of your contributions
- a lump sum
- a pension for your spouse, civil partner or another dependant
The payment of death benefits on most pension schemes is ‘discretionary’ and therefore won’t be part of the estate for Inheritance Tax purposes. Discretionary means that the pension provider is free to decide who to pay the death benefit to. Often they’ll follow the deceased’s wishes, although they don’t have to. If the lump sum isn’t discretionary there may be Inheritance Tax to pay. Your pension provider will be able to give you details about your pension.
Lifetime cash gifts can result in a ‘double gain’ of tax benefits if the recipient uses it as a pension contribution. This is because pension contributions receive tax relief at the saver’s highest rate of income tax.
So if you paid £10,000 into your child’s pension, this would effectively be worth £16,666 if they were a higher-rate 40% tax payer. The gift itself is free of IHT if the benefactor survives for another seven years.
Cash gifts can be used to mop up pension tax relief and it’s inter-generational planning.
CAREFUL PLANNING, NO MATTER THE SIZE OF YOUR ESTATE COULD MEAN – NO INHERITANCE TAX TO PAY
Take professional advice, any questions – welshmoneywiz@virginmedia.com
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