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| taxplanning:
inheritance tax |
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For the tax year 2007-2008 Inheritance Tax is payable after death
from your Estate on all assets above the current threshold of £300,000
at a rate of 40%. Your Estate includes the value of your house and
it's contents, your car, any savings and investments, and any gifts
made in the seven years before your death. However, anything that
you leave during your lifetime or on your death to your spouse,
a UK charity or other exempt body, plus any liabilities such as
loans or bills and funeral expenses are free of Inheritance Tax.
Your spouse may eventually be liable to pay the tax if the value
of his/her Estate left after death is above the threshold.
Because of the increase in property prices in Britain over the last few years and the fact that many more people are now able to afford their own homes, many more people are leaving their heirs with a substantial amount of Inheritance Tax to pay.
Example:
Mr Redfern is a widower who died in May 2007 leaving his entire Estate to his daughter.
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| Assets |
Value |
| Home and contents |
£505.000 |
| Car |
£15,000 |
| Bank accounts |
£20,000 |
| PEPs/ISAs |
£32,000 |
| Premium bonds |
£2,000 |
| Shares |
£11,000 |
| Total value |
£585,000 |
| |
| Allowable
deductions |
| Gas bill |
£55.00 |
| Telephone bill |
£50.00 |
| Funeral expenses |
£1,400.00 |
| Total deductions |
£1,505.00 |
| |
| Net value of the Estate |
£583,495 |
| Tax threshold |
£300,000 |
| Taxable amount |
£283,495 |
| Inheritance tax at
40% |
£113,398 |
| Net value to Mr Redfern's
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| daughter |
£470,097 |
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How to reduce the liability of paying Inheritance Tax
(1) Making Gifts up to seven years before your death
Making exempt gifts is a good way of ensuring that your money goes to the people or institutions that you want without being taxed. However, the gifts must be absolute, for example, giving your home away but retaining your right to live in it is called a "gift with reservation" and would not be exempt from Inheritance Tax.
The following are examples of gifts that are exempt from Inheritance Tax:
- Anything you give to your spouse (providing he or she lives in the UK)
- Gifts to UK charities, museums, universities, the National Trust and certain other institutions (although some of these may be taxed at 20% during your lifetime)
- Wedding gifts of up to £5,000 to each of your children
- Wedding gifts of up to £2,500 to each of your grandchildren
- Wedding gifts of up to £1,000 to anyone else
- Gifts up to a total of £3,000 in any tax year
- Gifts up to a total of £250 to any one person in any tax year
Potentially Exempt Transfers
A Potentially Exempt Transfer is a term, which describes certain types of gift, which, subject to certain conditions, will not incur a liability to Inheritance Tax. Specifically, gifts between individuals or into certain types of trust arrangements are termed as Potentially Exempt Transfers (PETs).
A PET made at least seven years before death becomes an Exempt Transfer. If death occurs within seven years, then the gift becomes taxable, subject to any taper relief and the nil rate band. The table below summarises the tax that would become payable.
| Years between gift and death |
0-3 |
3-4 |
4-5 |
5-6 |
6-7 |
7+ |
| Tax payable |
100% |
80% |
60% |
40% |
20% |
0% |
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The reduced scale applies to the tax due and not the gift. Therefore, if the gift is included in the nil rate band, then no tax is due and therefore, you will not benefit from taper relief
It is possible to put a gift into trust rather than making it an outright gift.The donor can then make sure that only the trustee will benefit from the gift.
Setting up a trust fund for your spouse may also help to reduce Inheritance Tax liability. A will trust can be set up for the spouse to benefit from after death or a lifetime trust in which the surviving spouse is named as a discretionary beneficiary can reduce the value of the Estate.
A good way of reducing liability is for the first partner to die to leave a substantial proportion of their Estate to someone other than the spouse so that he or she is not left with an amount higher than the threshold on death.
(2) Remove the future growth of assets from your Estate
The liability of Inheritance Tax does not remain static as many assets, such as property and shares, tend to grow faster than inflation thereby increasing your potential tax liability throughout your lifetime. One way of reducing the liability on this aspect of Inheritance Tax is by placing assets outside your Estate by way of loan.
The loan would remain yours but all capital growth on the asset takes place outside the Estate for Inheritance Tax purposes. For example, you could place £100,000 into a loan scheme and that capital would always remain yours, repayable to you on demand either as a lump sum or in smaller amounts to provide an income.
Loan Trust plans are available from a number of leading investment groups that provide all of the documentation for these schemes at no extra charge.
(3) Make provision for the liability
If it is not possible to gift money away during your lifetime to reduce the liability to Inheritance Tax then it is possible to open a regular premium policy which would provide a lump sum on your death which could be used to pay any Inheritance Tax. If the policy is written in trust then the proceeds will be outside your Estate and the funds would be available shortly after death, rather than waiting for probate.
Careful planning can reduce Inheritance Tax-taking steps sooner rather than later could avoid paying it altogether!
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