The Rules of Intestacy (dying without a will) make no provision for mitigating Inheritance Tax.
Our Legal Advisers are experts in this field and provide one of the most compelling reasons for choosingfor you service.
The basics of the tax means the first £325,000 can be left to friends or family and be free of tax (rising to £350,000 in 2010-11). This is referred to as the ‘nil-rate’ band.
Over this threshold the sum is charged at 40%.
In October 2007 the Chancellor Alistair Darling announced that married couples, and civil partners, can inherit each other’s unused element of the nil-rate band when one of the couple dies, giving them a joint nil-rate band of £650,000 (which will increase to £700,000 in 2010-2011). Importantly for cohabiters the same amount can pass to their children but cannot leave assets which are worth more than £325,000 to each other without facing anbill.
Ways to Reduce Inheritance Tax:
1. Use thenil-rate band.
2. Make a will.
Byyou could, for example, transfer some of your assets to children or grandchildren after your death within the nil-rate band, which would mean that these gifts are free of inheritance tax.
3. Update an existing will.
It is vitally important that you revise your will whenever your circumstances change; for example, when there is an addition to the family, your spouse dies or a divorce occurs.
4. Consider a potentially exempt transfer (PET)
Before you die you can give property cash or any other assets away, however you must live for a further 7 years after you have transferred them before they are ‘completely free’ of inheritance tax.
After 3 years, your beneficiary may get some tax relief and this can increase year-on-year until the 7 years have expired.
If you ‘gift’ your home but continue to live in it rent free the taxman will still view it as part of your estate. However you can give your home away to your child provided they live with you in the property until you die or you go into a care home, and both of you contribute to the running costs of the property.
5. Give your property away.
Ensure you make use of your annual exemptions:
i) You can ‘gift’ up to £3,000 in each tax year without being liable for inheritance tax. In addition the unused portion of the previous year’s exemption can be carried forward for one year. So couples who have not made use of their allowances last year can give away £12,000 in total this year.
ii) You can also give away £250 to any one person in a tax year. A good example of how this exemption can be used to cover Christmas and birthday gifts from grandparents to grandchildren.
iii) Wedding gifts may also exempt from Inheritance Tax. Each parent is permitted to give to each child up to £5,000. A grandparent can give each grandchild £2,500 and anybody else can give the newlywed £1,000. The gift must be made shortly before the marriage as it only becomes exempt when the marriage takes place.
6. Give away surplus income.
If you have surplus income year on year, then you can give it away free of inheritance tax. However you need to demonstrate that these gifts are part of your regular annual expenditure pattern and that they do not impact on your standard of living. You can also use this exemption to paypremiums for the benefit of someone else.
7. Get business property relief.
Certain categories of business and their assets may qualify for complete exemption fromafter 2 years. The relief normally applies to a business or an interest in a business (partnership) or to shares in an unlisted company. Shares quoted on the Alternative Investment Market (AIM) also qualify after you have held them for 2 years.
8. Donations to charity.
Gifts to charities, registered housing associations, recognised political parties, and gifts for national heritage are also exempt.