27th July 2015
The late Lord Roy Jenkins was once attributed with saying “inheritance tax is broadly speaking a voluntary tax paid by those who distrust their beneficiaries more than they dislike the Inland Revenue . A damning indictment indeed! There are options however that permit you to reduce, freeze or pay for this Inheritance Tax (IHT) liability.
What is Inheritance Tax however?
Inheritance tax (IHT) is a tax levied on people s assets most commonly paid when they die, but it can also apply in respect of certain transfers of assets during life. It is a mistakenly assumed that a person needs to be particularly wealthy to incur an IHT.
If the total value of all their possessions, less debts and liabilities, minus any available exemptions exceeds £325,000 then anything over that amount is taxed at
40%. This figure applies if they are single or divorced and is increased to £650,000 in total for people who are widowed.
Do you have an IHT liability?
MoneyDoctor s experienced adviser team can help you determine whether you have a bill and if so the scale of it. If there is an IHT bill there are many solutions to this problem that we can help you with, examples of this include:
- Annual gift allowance you are permitted to gift £3,000 per donor per tax year which is instantly IHT free. If you have not utilised this allowance in the previous tax year this will double your allowance to £6,000 in that tax year, this can be only carried over once.
- Outright gift to beneficiaries or into a trust the tax on the capital will be eliminated 7 years after the date of the gift. If you prefer beneficiaries not to receive the monies immediately, yet you want to start IHT planning, then utilising a trust may be the preferred option. For this solution to work, you would not have access to the capital again in most instances. However, we have identified solutions where you can have varying degrees of access to the capital in the trust, yet it is still IHT free after 7 years.
- Freeze the future IHT bill where all future profit is IHT free, yet you have the reassurance of knowing that you still have access to the original capital.
- Eliminate the IHT tax bill after 2 years via business property relief. There is no need to gift monies or set up a trust for this option to be successful.
- Provide the funds for the beneficiaries to pay the bill via a life assurance policy written in trust. In many instances the total premiums paid over the lifetime can be significantly less than the IHT liability itself.
- This will depend on individual circumstances of course.
- Leave money to UK registered charities as all of this bequest is IHT free under current legislation.
- Gifting out of excess income which reduces the IHT on the gifted income instantly. This is one of the most underused but most powerful methods of preventing the IHT bill worsening in the future.
- Spend it! This is the most fun packed method of reducing an IHT bill. For example by paying £10,000 for an expensive holiday will see a potential IHT liability reduce instantly by £4,000!
- A gift of £5,000 per parent to a child for their wedding is not only an act of love, but an act of IHT reduction!
- Payments by parents for the education of their children is deemed to be IHT free as long as it can be demonstrated that the money is exclusively used for educational purposes.
With the Conservative Party back in power and a new budget set for July, IHT planning may change. It is interesting to note that the Tory pre-election pledge in May 2010 to increase the inheritance tax nil rate band allowance to £1 million, never materialised. The only guarantee to reduce your IHT bill is to take action and not rely on the uncertainties of promises.
Everyone’s individual circumstances differ hence the need for an individual assessment of your circumstances by your adviser team, at MoneyDoctor Wealth Management.