Inheritance tax: how to cut your bill as new coalition abandons rise in exemption
Published ¤ 14/05/2010 11:44:49
A planned increase in the IHT threshold to £1m has been shelved by the new Tory-Lib Dem coalition government. Here are 10 ways to ensure you don't pay more inheritance tax than you need to.
This article was taken from the Telegraph.co.uk on 12th May 2010. Text in italics has been added.
An increase in the inheritance tax threshold to £1m - or £2m for couples - is to be an early casualty of the new coalition government of the Conservatives and Liberal Democrats.
Instead, the current exemption of £325,000 or £650,000 for couples will remain for the life of the current Parliament - which means, given the coalition's commitment to a fixed term of office, that the threshold will remain unchanged until at least May 2015.
Karen Barrett, chief executive of Unbiased.co.uk, the independent financial advisers group, said: "This brings additional stress for the deceased person's family at a difficult time, as this tax must be paid before any inheritance is passed on." Unbiased.co.uk claims a third of voters support a higher IHT threshold but Britons paid £2bn more of this tax than necessary last year.
Here is our 10-point guide to help you and your family make sure you pay no more IHT than you need to.
1. MAKE A WILL
This is the first step toward avoiding IHT. If you die intestate you will have no control over how your assets are distributed and you may end up paying IHT unnecessarily. Jill Dando, the late television presenter, died intestate, so her father automatically inherited her estate as next of kin.
George Bull, a partner at the accountants Baker Tilly, said: "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."
2. BE GENEROUS SOONER RATHER THAN LATER
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 - then HM Revenue & Customs (HMRC) may apply "gift with reservation" rules to apply tax as if the transfer had never happened.
3. MAKE IT A WEDDING TO REMEMBER
Donors don't need to survive seven years for some gifts to become IHT-free. John Whiting of PricewaterhouseCoopers said: "If you cannot afford to give big money away, it makes sense to use the smaller allowances such as the £3,000 per person annual allowance for gifts to anybody and the ability for parents to give up to £5,000 to their children when they marry - and that could be £5,000 from each parent to each adult child."
4. KEEP IT IN THE FAMILY
Discretionary trusts can be set up for about £500 and enable assets up to the nil rate band of IHT of £325,000 per person or £650,000 for a married couple or civil partnership to be sheltered from IHT, so long as the donor survives seven years. Unlike outright gifts, these trusts let donors retain control of the assets.
Additionally, putting your life cover in trust can seriously reduce the amount of IHT payable, even if the policy is intended to repay a mortgage! At PKS we offer this as a FREE service.
Mike Warburton, senior tax partner at accountants Grant Thornton, explained: "There will typically be two trustees to control the trust and these will usually be the parents. Discretionary trusts can be a useful way to avoid IHT, while also preventing the adult children recipients from buying a Ferrari, for example."
5. MAKE REGULAR GIFTS FROM INCOME
People with substantial income who make a habit of distributing some of it can cut their tax bills. Mr Warburton said: "For gifts to be IHT-free, they must satisfy three key tests: they must be made out of income - as opposed to selling assets to fund them; they must be regular - or at least the intention must be for them to be regular; and they must not reduce the donor's standard of living."
6. BECOME A GENTLEMAN FARMER
Complex rules govern business property and agricultural land reliefs, so professional advice should be taken - not least about the risk of losing your capital while trying to avoid tax. But, in general, agricultural land that is let out can become IHT-free after seven years and could be IHT-free after two years if you play a part in farming it.
7. DO MENTION THE WAR
Where injuries suffered during military service are a contributory factor in anybody's death, then that person's estate may become IHT-free. Mr Warburton said: "Not many people know about this exemption but it enabled a Duke of Westminster to avoid IHT when he died many years after injuries sustained during World War II and it may now be relevant to more people, following our military intervention in Iraq and Afghanistan."
8. UNLOCK WEALTH TIED UP IN BRICKS AND MORTAR
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 in that asset before it can be taken into account for tax. Equity release schemes marketed by members of the Safe Home Income Plans (Ship) trade body promise borrowers they will never be in negative equity.
Equity release is a complex product, and can affect state benefit entitlement. It is essential to get professional, independent advice.
9. BEWARE THE PITFALLS OF PEPS AND ISAS
Individual Savings Accounts (Isas) are popular ways of avoiding tax on income and gains from a wide variety of savings and investments - but they confer no protection against IHT. Seek expert advice that can take all your assets into account.
10. LEAVE THE COUNTRY
Even more extreme than it sounds. Changing your domicile - the country that you regard as home - is more difficult than changing the country in which you are deemed to be resident for tax purposes.
Mr Whiting said: "One definition of domicile is the country in which you intend to be buried. If you are domiciled overseas, then only assets based in Britain will be subject to IHT, whereas IHT would cover your worldwide assets if you were domiciled here."
If you are concerned about your estate paying too much inheritance tax, then you should seek professional advice. At PKS we have numerous schemes to help reduce the amount of tax payable after death. Call us on the number above to discuss your situation in utmost confidence.
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