Ensure your family benefits using Inheritance Tax Planning
According to recent research* we will give up over £2
billion to inheritance tax (IHT) this year, but with careful planning
you can save yourself and your family from this most hated of taxes...
Inheritance tax (IHT) applies to everything in your estate including
properties, savings, investments and your share of jointly owned assets
that together add up to more than the nil-rate band of £325,000
(for 2009/10). Anything above this nil-rate band is charged at 40% IHT
which would be £70,000 on an estate worth £500,000.
In October 2007, a transferable nil-rate band was introduced
which allows married couples and civil partners to transfer any unused
nil-rate band to the surviving spouse, allowing them to save on IHT when
they die. Whilst this may not cover all of your IHT, there are other ways
of reducing the tax using forward planning.
Think ahead...
IHT is sometimes referred to as a voluntary tax because there is so much
that you can do to avoid it. You can substantially reduce your estate
and therefore your IHT liability by giving it away prior to your death.
If you live for seven years after gifting away part of your estate and
you no longer reserve any right to that gift, then it won't be classed
as part of your estate and you escape the IHT on it.
These gifts are referred to as potentially exempt transfers (PETs) and
they are particularly beneficial as any growth is immediately outside
your estate despite the gift taking seven years to leave. This means that
if, for instance, your house were to rise in value over the next seven
years you wouldn't be charged IHT on the growth despite it still officially
belonging to your estate until the seven years has passed.
Alongside these PETs there are a number of other exemptions that you can
use to minimise your exposure to IHT:
An annual gift of up to £3,000
An unlimited number of gifts per year that are below £250
Gifts for marriage between £1000 and £5000 calculated
according to your relationship with the couple
A sums paid from your income to another individual. This is unlimited
as long as it is a regular payment and it doesn't affect your standard
of living.
The good news is that all of these exemptions are classed as immediately
outside your estate although you must ensure that you document them fully.
The other alternative is to invest in trusts for your beneficiaries.
Trusts
If you want to make provisions to minimse your future IHT bill but you
don't want to lose control of your estate completely then a trust could
be for you. There are a variety of trust schemes that enable you to improve
your IHT liability whilst still retaining some control over the assets
and this may be particularly beneficial if your intended beneficiaries
are very young or perhaps are about to divorce and may therefore lose
some of the assets.
Like PETs, most trusts can take seven years to leave your estate as far
as IHT is concerned but crucially, the trustees are able to alter how
the trusts assets are distributed and as such there is more flexibility.
There are also trusts that allow you to set them up to provide an income
for you and others that enable some of the assets and any growth to be
immediately classed as outside of your estate.
The wide variety of options available makes IHT and trusts in particular,
a very complicated subject. It is essential to seek expert advice before
considering a trust as there are a number of different options available,
enabling you to tailor your tax planning to your individual circumstances.
Your home?
Possibly the most difficult decision to make in terms of your IHT planning
is what to do about your property. For many of us, our home is our biggest
asset and as such it stands to be the area most affected by IHT. However,
you also need a home to live in and gifting away your primary residence
can be a scary prospect.
The reason that property is the most complicated area of IHT planning
is that many of us wish to continue living in our property until we die.
However, if you gift your home to your children but continue living there
then you will be 'reserving benefit' which means it will never fully leave
your estate and IHT will still apply. To add insult to injury, your children
could end up paying capital gains tax if they don't use the house as their
primary residence which would put them in an even worse position.
In order to avoid this you could give or sell your property to your children
and pay rent to them in order to continue living there. Whilst this would
mean the house would leave your estate after seven years, it would also
mean that the rent you pay your children would be classed as income and
they would be taxed accordingly.
One solution is for the child to live in the house with you and the you
can give half the house to them. As long as the child shares the running
costs of the property then HMRC will class your estate as owning half
the property which reduces your IHT. If this isn't possible then you could
use borrowing (known as 'equity release') to reduce the value of your
estate and either spend the money or gift it to your beneficiaries.
Seek expert IHT advice
The variety of options available for IHT planning can be quite confusing
and it is vital that you get it right in order to minimise the amount
of your hard earned assets that can be stripped away by HMRC.
The expert advisers at ContractorFinancials can help you to make the
most of your IHT planning and ensure that your assets fall into the hands
of your beneficiaries rather than those of the tax man.
* research conducted by unbiased.co.uk
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