Continuing the theme of avoiding tax, let's look in more detail at the UK's Inheritance Tax (IHT). As they say, death and taxes are unavoidable - but you might be able to dodge the tax on death!
On the face of it, the UK's IHT is a 'blunt instrument' - if your estate is valued at more than the personal IHT allowance (or 'Nil Rate Band' is currently £325,000 - and not increased for a couple of years), then wham! - 40% tax on the excess. Yet most of us would like to leave something to kids, relatives or even charity.
Fortunately there are some ways to fend off the Taxman.
IHT applies to your estate, including property, cash savings, shares and other investments, including ISAs; also some gifts given in the past 7 years might still have to be included (see below). Your pension annuity usually 'dies' with you (unless it is a joint pension). Special tax rules apply to unused pension balances.
This is a complex area and individual situations differ. You will need to do your own research; but as a starting point, here are my top 10 tips to avoiding IHT.
1) Get married (or civil partnership). This is, surprisingly, the most important step to take. Not only can you leave everything to your spouse (assuming they live in the UK), but when they subsequently die both personal allowances can be pooled (i.e. currently a total of £650k). Use simple 'mirror' wills (available online, if your family circumstances are not complicated) to ensure that this happens.
2) Reduce the value of your property. The value of the family home is likely to take you above the double allowance, especially if you live in the South East. There is no simple solution but options include downsizing (to a smaller and more easily maintainable property), selling completely and renting or some form of home reversion.
3) IHT property exemptions. I've included this, although it will not be useful for most ordinary people. Some forms of property are not subject to IHT. In particular, 'business relief', 'heritage assets', which can include woodland and 'agricultural relief', which may include buildings on a working farm. Only part of the value may be exempt. Specialised advice is needed, obviously.
4) Exempt Beneficiaries. In addition to your spouse/civil partner, you can make IHT-exempt gifts (during your life or in your will) to some other organisations, such as charities and political parties.
5) Annual Gift Allowance. You can give away gifts worth up to £3,000 in total in each tax year and these gifts will be exempt from IHT and any unused part of the £3,000 exemption can be carried forward to the following year.
6) Gifts on Consideration of Marriage/Civil Partnership. You can give your children £5,000, your grandchildren £2,500 and anyone else £1,000. Strictly speaking, this is not a wedding present but a gift that is conditional on the marriage.
7) Small Gifts. You can make a number of 'small gifts' up to a total of £250 in any one year.
8) Exempt Regular Gifts. You can make unlimited gifts as regular payments (e.g. monthly or annual) provided they are out of your normal after-tax income (but not capital). You can also make payments into a life insurance policy for yourself, with someone else as a beneficiary. Most interestingly - from a tax perspective - you can pay into someone's pension, and get the tax refunded (at the basic rate).
9) 'Seven-Year Rule' Gifts. Also called Potentially Exempt Transfers, these require that you survive for 7 years (so a bit of a gamble on your mortality). There's a sliding scale ('taper relief') if you kick the bucket earlier. If you make large lifetime gifts, the beneficiaries (or you) could take out life insurance against the potential IHT bill. Gifts must be unconditional, however, without any 'quid pro quo' - otherwise it may be considered a 'gift with reservation of benefit' (e.g. giving them the house but still living in it rent-free.)
10) Spend it! Life's too short and it's a big wonderful world out there.
Do you have any other ideas?
I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.
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