In the event of your premature death, unless you plan carefully your family could end up paying a sum in Inheritance Tax (IHT). Have you recently assessed your potential liability to IHT? If so, and you have a potential liability, have you planned to reduce it? We can help you ensure that more of your hard-earned assets go to the people you want them to rather than falling into the hands of the taxman.
If you are single or divorced, current UK legislation allows the first £325,000 (2010/2011 tax year) of your estate to be free from IHT, or £650,000 if you are married or have entered into a civil partnership or are widowed (providing no previous gifts were made by the deceased spouse). Under current legislation the taxman could take 40 per cent of everything you leave over the threshold (known as the nil rate band) and this includes properties, personal effects, cars, savings, investments and insurance – collectively known as your estate.
There is a range of allowances that you can use to mitigate a potential IHT liability. The major ones are as follows:
Annual Exemption – everyone is entitled to give away £3,000 exempt from IHT in any one tax year. If not previously used, then this allowance can be backdated one tax year, so in effect £6,000 could be given per donor to begin with, thereafter £3,000 per annum (optional).
Marriage Gifts Exemption – each parent can give wedding gifts of up to £5,000 to each of their children. Grandparents can gift up to £2,500 to each grandchild. Also, you can give up to £1,000 as a wedding gift to anyone else. These gifts must be given before the wedding day. You can make gifts utilising more than one of the above allowances to the same person.
Small Gifts Exemption – any number of gifts to different people up to a value of £250 each can be made in a tax year. If the total value of gifts to any one person exceeds £250, then all gifts to that person must be deducted from the £3,000 Annual Exemption mentioned above. All of the above have the effect of reducing the estate upon which the IHT can be levied.
In most cases, any direct gift amount made either direct or into an absolute trust by any one person over the exempt gift allowances is a Potentially Exempt Transfer (PET). This means that you, as the donor, need to live for seven years from when the transfer is made for the gift to fall outside your estate. During the seven-year period the amount of tax payable on death reduces each year. This is known as ‘taper relief’. However, this relief applies only to the part of a gift that is in excess of the nil rate band.
Gifts to Trust – this method allows the placement of monies in a suitable investment and then this is wrapped within a trust, of which you and other people of your choosing can be trustees. The monies remain in trust and all, or amounts of this, can be distributed when you choose.
Life Assurance Policy – this is used to insure the liability with a ‘whole-of-life policy’. Under some circumstances, this can be a cost-effective way of providing for the eventual bill and can be reasonably simple to set up. The ‘whole-of-life policy’ has a sum assured which is paid to the beneficiaries on death; due to the fact it is written under an appropriate trust, it can be paid prior to the rest of the estate being released and can, therefore, be used to contribute towards or pay for the IHT bill for the estate.