“A penny saved is worth two pennies earned . . . after taxes.”
The Government announced in Budget 2010 that the threshold below which estates are not liable for Inheritance Tax (IHT), the nil-rate band (NRB), would be frozen at £325,000 until April 2015. On 11 of February 2013 it was announced that the IHT NRB would remain frozen until April 2018. This supersedes previous announcements on the level of the threshold.
IHT is levied at a fixed rate of 40% on assets exceeding £325,000 per person – or £650,000 per couple. Freezing tax allowances means that more estates will now be caught under the scope of IHT and families will need to consider estate planning opportunities by maximising reliefs and exemptions.
Fortunately, there are many exemptions and allowances available to mitigate IHT. Unfortunately, some of the most valuable exemptions must be utilised seven years before the donor’s death. So it makes sense to consider ways to beat IHT sooner rather than later.
Make a Will
This is the first step toward avoiding IHT. If you die intestate (The Rules of Intestacy apply when a person dies without leaving a valid Will) you will have no control over how your assets are distributed and you may end up paying IHT unnecessarily. For example, you may have intended to leave everything to your spouse but, in the event of intestacy, other relatives may be entitled to a share and IHT would have to be paid.
Be generous sooner than later
The simplest method to reduce an estate is to give it away. If you live for seven years after making a gift, as long as you don’t reserve any right to it, it will be outside your estate for IHT purposes – when such a gift is made to an individual it is known as a potentially exempt transfer (PET). As well as PETs, there are a number of exemptions you can use. These are immediately outside your estate and include: an annual gift of up to £3,000 (plus the previous year’s allowance if not used); gifts of up to £250 per year which can be made to as many different individuals as you like (although you can’t use this in conjunction with any other exemption); and gifts upon marriage, which vary in size from £1,000 to £5,000, depending on your relationship to the bride or groom.
You can also make unlimited gifts, as long as they are regular, or at least the intention must be for them to be regular and they must be made out of income, as opposed to selling assets to fund them, and they must not reduce the donor’s standard of living. Please note that if you use this exemption, it is essential to document it fully. From 6 April 2012, if you leave 10 per cent of your estate to charity the tax due may be paid at a reduced rate of 36 per cent instead of 40 percent.
All gifts made more than seven years before the donor dies are free of IHT. However, if you reserve any benefit from a gift – such as continuing to live in a house you have given away “gift with reservation” rules may be invoked to apply tax as if the transfer had never happened. Now that it is impossible to shelter the family home from IHT and remain living in it, another solution is to spend some of the wealth from that asset before it can be taken into account for tax. For further details please revisit my colleague Paul Kemsley’s latest article. (Can I pass my property to my children and cut my tax bill?)
Trusts can be set up to enable assets up to the nil rate band of IHT of £325,000 per person or £650,000 married couple or civil partnership to be sheltered from IHT, so long as the donor survives seven years. My colleague James Corcoran covered Bypass Trusts in respect of pension death benefits in his latest article and this is a very effective way of sheltering your pension from IHT. Unlike outright gifts, these trusts let donors retain control of the assets.
If you own a business or a share of a business, this is included in your estate for IHT purposes. However, Business Property Relief may allow you to pass on some of the business free of tax, either during your lifetime or as part of your will.
There are many options to help reduce your IHT bill, therefore I would encourage you to speak to your COURTIERS adviser to discuss this.
Ermir Pashaj Dip PFS
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