Make sure your assets are protected against unnecessary and hefty inheritance taxes by knowing, and working within, the law. It may mean that prized assets can be passed on and enjoyed by your family, rather than the taxman.
As it stands at present, inheritance tax is due on assets such as estates and property if they are valued over the current IHT threshold: £325,000 is the magic number for 2011-2012. If your assets exceed this figure then you are expected to pay tax at 40% on whatever the amount is over this threshold. This means that an estate worth £330,000, just £5,000 over the IHT threshold, will receive a tax bill of a staggering £132,000.
One way of avoiding this is to give away assets in the form of gifts that are exempt from inheritance tax. Below are some the circumstances in which HMRC allow tax free gifting:
Tax free gifts can be made to certain people, groups and organisations. This includes your spouse or civil partner as long as they are residing permanently within the UK. Qualifying charities, national institutions, and major political parties also all qualify as exempt beneficiaries.
Up to £3,000 can be given away each year and will not be susceptible to IHT. This can be given and spent however the beneficiary wishes: a first car or holiday abroad perhaps.
Throw a blow-out wedding
Gifts that are given towards a wedding or civil partnership ceremony are exempt from inheritance tax so long as they remain underneath certain thresholds. Parents are able to give cash gifts of up to £5,000 for each child whilst grandparents can give up to £2,500. Other family members or friends can give up to £1,000. These gifts must be made on or shortly before the ceremony date: an excuse to open up another bottle of champagne?
In each tax year you are given an allowance to make smaller gifts. £250 can be given as a small gift to any number of different people and will not be taxed according to IHT.
‘Potentially’ exempt transfers
Remember the seven year rule: a gift can be free of IHT so long as they are made more than seven years before the donor dies. This means that you may pass on any asset onto your beneficiary potentially tax free, but if you die within seven years of making the donation and it is worth more than the £325,000 threshold, inheritance tax will need to be paid by the beneficiary or trustees. Retaining an interest in any gifted asset may affect the exemption to inheritance tax regardless of this seven year rule. For instance, if you gift your home to you children whilst continuing to live in it without paying full market rent, income tax will be charged to the beneficiaries.
There are many rules and regulations regarding inheritance tax and the government is contently reviewing and updating them. Please speak to an independent advice team specialising in inheritance tax planning for the latest regarding regarding IHT and an impartial, free, no obligation consultation.