HM Revenue and Customs: Not left to chance
UK taxpayers lose millions through poor IHT planning. Don’t be among them.
Follow The JC on Twitter
According to the annual Tax Action report, UK taxpayers will lose nearly £2 billion this year, due to poor inheritance tax (IHT) planning. Liability to IHT can often be reduced or even eliminated with early planning.
Everyone in the UK has a tax-free inheritance allowance of £325,000 (2010/11 tax year). This means that if you are single and die with an estate worth less than £325,000 there will be no tax to pay.
However, if your estate is more than £325,000, 40 per cent IHT will become due on money, property and investments, but after deducting debts and expenses such as funeral costs.
What if I'm married?
IHT is not payable when assets are passed between husband and wife, or between civil partners.
Married couples or civil partners can transfer their unused IHT allowance to their spouse when they die; therefore a couple would escape IHT by doubling both their allowances to £650,000.
The allowance is restricted where the recipient is non-domiciled, but non-domiciled status creates a separate set of tax-saving opportunities.
Increases in house prices in recent years have brought many estates over the tax-free threshold. It is therefore important to consider early planning for inheritance tax liabilities. Here are some suggestions:-
● Make a will
Making a will and being sure people know where to find it is the first step to ensuring your estate is shared out exactly as you want.
● Make exempt gifts
Gifts of up to £3,000 per annum will immediately fall out of an estate for inheritance tax. What is less well known is the opportunity to make further regular gifts out of income, which in certain circumstances can also be exempt.
● Make potentially exempt gifts
Even if a gift does not carry immediate exemption, after seven years it will normally fall outside the estate. As such it is "potentially exempt" for the seven-year period. It is possible to take out insurance to cover additional inheritance tax if the donor does not survive seven years
● Consider using a trust
A trust is a useful vehicle for people to remove assets from their estate without having to surrender control. It can also provide a way of deferring capital gains tax that can arise on making certain non-cash gifts. With careful planning, assets can therefore be settled in trust, free of both inheritance tax and capital gains tax.
● Invest in exempt assets
As an alternative to giving assets away, you can think about holding assets which qualify for inheritance tax reliefs. For example certain business assets attract 100 per cent relief once they have been held for two years.
Mark Tenzer is a partner at Jeffreys Henry LLP, a leading firm of chartered accountants and tax specialists. For further information, or to arrange a free initial tax consultation, call 020 7309 2222 or email firstname.lastname@example.org
The above article is for general information only. Professional advice should always be taken before taking any action