Inheritance Tax Lifetime Strategies
There are a number of developed strategies to save inheritance tax on the following:
The family home - removing the value of your home from your estate.
Investment properties - giving away properties without capital gains tax.
Businesses - maximising relief on business and agricultural property.
Using a nil rate band discretionary trust.
Creating a debt or charge to use the nil rate band.
Double discretionary trust.
Doubling up business and agricultural property reliefs.
Inheritance Tax and the use of Trusts
A trust is a useful way to remove an asset from your estate for inheritance tax and to retain control of it, saving inheritance tax (or death duties) and protecting your family’s wealth through trusts.
You don't need to be rich for your estate to be subject to inheritance tax.
Inheritance tax is currently charged at 40% on the full value of your estate above £255,000. Your estate will include everything:Investments & Savings
Home & Car
Furniture & Personal effects
Life assurance, unless it is written in trust
Inheritance tax is not paid where your estate passes to your spouse, but if you do not have a spouse, or on your spouses subsequent death, inheritance tax is paid by those who inherit. Inheritance tax must be paid by or deducted from the estate before your assets are distributed.
Calculate the potential tax bill on your estate using an inheritance tax calculator.
For those who wish to protect their assets from the UK tax authorities there are many ways to ensure you pay the lowest possible level of tax on your estate.
Solutions can include creating trusts, utilising nil rate bands, arranging life assurance policies or utilising multi-life offshore products.
Careful planning is required and consultation between a solicitor, accountant and independent advisor is recommended, rules and regulations often change with regard to inheritance tax and you should keep up to date with your estate planning. Please note First Choice Finance is not an expert in inheritance tax and this article is for guidance only, it is best to suit expert help from an inheritance tax expert.
What Are Inheritance Tax Exemptions?
What are inheritance tax trusts?
Inheritance Tax And using Wills
Inheritance Tax Glossary
What Are Inheritance Tax Exemptions?
The inheritance tax law in the UK is very complex, and it pays to consult with a properly qualified financial adviser and/or a solicitor before taking any action.However, the following inheritance tax exemptions mean that tax can be completely avoided in many cases. Any transfers between UK domiciled spouses (otherwise up to £55,000); Transfers to UK Charities and political parties; Small gifts of up to £250 per tax year. You may give £250 to as many people as you like each tax year; The first £3000 of any other gifts per tax year (or £6000 if no gifts were made in the previous tax year); Certain gifts on consideration of marriage; Gifts out of taxed income - this has already had tax paid on it. However, you must justify that you can maintain your current standard of living; The use of these inheritance tax exemptions can reduce greatly the amount of tax that will be paid.
What are inheritance tax trusts?
Inheritance tax Trusts are devices where an individual can make gifts for the benefit of others, and also help to avoid inheritance tax. Once the gift into the trust has been made, this cannot be reversed. The person making the gift (called the settlor) appoints trustees to look after the money or assets in the trust. These trustees have duties to look after the assets in the trust for the benefit of the beneficiaries of the trust.The benefit of using trusts with inheritance tax planning is that these gifts can pass outside of the estate of the settlor, and therefore help to avoid inheritance tax.
The use of inheritance tax trusts is a very complex area, and we would always recommend that you discuss your situation with one a professional advisers before taking any decisions.
However, inheritance tax trusts, if used correctly can result in avoiding inheritance tax completely in some cases.
Inheritance Tax And using Wills
A well known way to avoid inheritance tax on your death is to make a will so that you make best use of the allowances to you during your lifetime. Of course, the main reason for making wills should not be to avoid inheritance tax, but to plan where your assets should go when you die.If you do not make a will, you will die intestate. This means that you will lose control over the final destination of your assets (regardless of inheritance tax planning), and the state will decide the priorities based on an outdated formula. For example, if you are married, you could find that some of your money will go to your spouse, and some could go to your children. However, the amounts will not be determined by your choice or the needs of your family, but on a complicated formula.
Anyone seeking to plan for inheritance tax would be recommended to make a will first, especially if you are married. By making a will you should be able to make best use of the available reliefs due to you, especially if you are part of a married couple.
Inheritance tax wills can help you to save a lot of tax. For example, a common solution that we recommend is for each partner in a married couple to use their wills to set up a trust on their death. On the first death the amount gifted into this trust (up to the tax-free limit of £255,000) will pass out of their estate free of inheritance tax. This money can then be used to benefit the surviving spouse.
The real savings with these type of inheritance tax wills are when the second spouse dies. Because we have placed some of the money into trust, their children can receive this money free of inheritance tax. If the maximum amount is invested in this way, these type of inheritance tax wills can save up to £102,000 in tax!
Inheritance Tax Glossary
Assets - The things you own - property, personal possessions, savings and investments.Capital Gains Tax (CGT) - a tax on gains arising from the disposal of assets. The tax is levied on the total of all chargeable gains after the deduction of allowable losses and allowances.
Chargeable Lifetime Transfers/Gifts - these are transfers which are neither exempt nor potentially exempt. The most common chargeable transfers are those into Discretionary Trusts. A transfer will be chargeable if it (together with any cumulative transfers made within the last seven years) exceed the nil rate band. Tax is payable at 20% on the excess over the nil rate band and there will be no further tax to pay if the person making the gift survives for 7 years. If death occurs within seven years, the tax at death rates will apply to the transfer retrospectively. Credit will be given for the tax already paid.
CGT - Capital Gains Tax
Domicile - The country you live in for tax purposes this would normally be where your house is and where you intend to be buried.
Estate - All your assets . It can also include certain gifts that you have made.
Executor(s) - when someone dies, responsibility for their affairs is taken on by the people named in the deceased's will.
Exemptions - things that are excluded from IHT
Gift With Reservation - an asset which a person has given away but has retained a benefit in it i.e. giving a property away and still living in it
IHT - Inheritance Tax
Interest In Possession - the legal right to income from or enjoyment of property, as and when it arises.
Joint Tenants - two or more persons who hold property as joint owners.
Letters Of Administration - if a person has not made a will then you will need letters of administration to deal with the estate and not probate. Only specified people in a given order would be eligible to request letters of administration.
Lifetime Transfer/Lifetime Gift - a gift made during your lifetime other than those allowed in you annual exemptions
Nil rate band - the value set by the Government where, if a persons estate is valued under it, there will be no liability to Inheritance Tax.
Lifetime Transfer/Lifetime Gift - a gift made during your lifetime other than those allowed in you annual exemptions
PET - Potentially Exempt Transfer
Potentially Exempt Transfer (PET) - transfers/gifts to individuals and certain trusts can be PET's. There is no immediate tax liability on a PET and no eventual charge as long as the person making the transfer/gift survives for seven years after making it.
Probate - this is the formal process whereby an executor of a will obtains the formal documentation needed to deal with the estate of the deceased and make sure the provisions of the will are adhered to.
Tax year - a tax year is from the 6th April in one year to the 5th April in the next year.
Taper Relief - (applies to GCT and PETs) - When a PET is made its value will be subject to Taper Relief . If you survive 3 full years from the date of the gift, Taper Relief will reduce the amount of tax on that gift to 80% of the full death rate (40%). This Taper Relief increases each year the person survived up to a maximum of 7 years where the gift falls totally outside the estate. However if the PET fails taper relief will only be available on amounts over nil rate band
Tenants In Common - two or more co-owners who hold property in undivided shares which may or may not be equal.
Trust - a trust is an obligation that binds a person (the trustee) to deal with property over which he has control (the property in the trust) for the benefit of certain people (the beneficiaries). For example, if a person took out a life assurance policy in trust for his children, it would be paid to the children upon their father's death by the trustees of the policy. Because the policy was set up under a trust, it does not form part of the estate and does not have to wait for Probate to be obtained in order to pay out. The premiums for the life assurance policy would not count towards Inheritance Tax if they formed part of his annual (£3,000) gift allowance or could be seen to be paid from income without reducing there standard of living
Trustees - the legal owner of property that is inside a trust. The trustee will hold the trust property for the benefit of the eventual beneficiaries.
United Kingdom Resident - This site is aimed in the main at UK residents however some non-residents may well be liable to IHT
Unquoted Company - This is a company that is not listed on any stock exchange