There Is Nothing Certain In Life But Death And Taxes

There Is Nothing Certain In Life But Death And Taxes

Only the rich have to pay Inheritance tax, dont they?

In the past, this may have been true, but it is fair to say that most people do not worry about Inheritance tax because they think either it wont happen to them or they can do nothing about it.

Given the way that house prices have rocketed over the last ten years, a lot more people now fall into the Inheritance Tax brackets. Agreed you are only liable to pay this tax if your assets are worth more than a certain amount; but are you sure what that amount is?

Thankfully, the Chancellor of the Exchequer made some changes in October 2007 so that many more couples could take advantage of both of their allowances .The joint threshold for married couples and those in civil partnerships for 2008/2009 is now 624,000. This will rise to 700,000 from 2010. The threshold for individuals is currently 312,000, but this will rise to 350,000 in the future, assuming things dont change again!

Your estate from which the allowance is deducted includes your home and all your worldly goods and possibly gifts that have been made over the previous 7 years. From the total anything that is owed by the estate at the time of death will be subtracted to give the final figure on which the tax is due. The deductions from the Estate include any debts and a moderate figure to include any funeral costs.

So what is the problem? Well the problem is that your heirs have to pay 40% Inheritance Tax on anything over and above the allowances, for a couple that would normally be 624,000. I say normally since what if some of the allowance had already been used up when the first of a partnership died? Only the remaining unused element of their allowance can be passed to the spouse/partner.

So a couple worth, say 700,000 will leave a tax bill of around 30,400 if they do not plan properly. I have got to ask you, do you really want to leave your hard earned cash to the Government or to your children?

Okay, so lets get down to what this actually means for you. Your estate includes everything owned in your name and a share of anything you jointly owned. Your estate would also include any gifts where you still get some benefit from, such as a home gifted to a son or daughter in which you still live. Other things that may be included could be the assets held in certain types of trust from which you receive an income.

So how can I avoid Inheritance Tax?

Well the easiest way is to ensure your estate is below the threshold at death, but that is not as easy as it sounds, since none of us can be sure as to when we are going to die!

You could make a 'potentially exempt transfer', where money is given away to an individual, which is an effective tax planning solution, if you have plenty of spare money. This will be exempt from Inheritance Tax providing you gift survive for seven years.

You could put money put into what is known as a 'bare' trust. This type of trust also counts as a potentially exempt transfer and occurs where a beneficiary is entitled to the trust fund on reaching the age of 18. This can be useful to put money aside for grandchildren so that they cannot get access to it until they are old enough to make sensible use of it.

Getting this right is important, as gifts made to other types of trust will be treated as chargeable lifetime transfers. Whilst modest transfers may incur no tax, larger transfers could attract an immediate tax bill of 20% and further amounts in the future. So proper planning is vital.

Are all Gifts subject to the 7 Year Rule?

Well no, there are some cash gifts that are exempt from tax and the seven-year rule. So what are these exempt gifts? Well, they include:

wedding gifts up to 5,000 to each of your children
wedding gifts up to 2,500 to each of your grandchildren
wedding gifts up to 1,000 to anyone else
Other gifts of up to 3,000 a year per donor (plus any unused balance of 3,000 from the previous tax year only)
You can give gifts up to 250 each to as many people as you like people each year
You can give gifts to charities, national museums, major political parties and most registered housing associations.

What is all this about joint allowances for couples?

The draft legislation proposed in the Finance Bill 2008 allows for a claim for the transfer of any unused nil-rate band on a person's death to the estate of their surviving spouse or civil partner, who dies on or after October 9, 2007, irrespective of the date of death of the first spouse to die.

Those spouses who wish to rely on the transferable nil-rate band in their planning, whether by way of outright gifts on the first death or transfers via the will to immediate post-death interest trusts, will need to keep detailed documentation, perhaps for many years, and be aware of the necessity for their personal representatives to make any claim in the prescribed timeframe.

In this respect, clients will need to bear in mind that any claim by their personal representatives that relies on using part of the transferable nil-rate band of a previous spouse would be subject to a formal claim being made. A claim must be made within 24 months from the end of the month in which the survivor dies and will be made by the personal representatives or somebody who suffers an IHT liability on that estate.

So what planning should we do while we are alive?

Some of the things that need considering depending on the size of your estate are:

Correctly worded Wills to ensure that assets pass to the right people at the right time.
Lasting Powers of Attorney - to ensure your financial and well being needs can continue to be dealt with should you become unable to deal with them yourself.
Ownership of assets to make sure you retain control of sufficient assets for your own needs during your lifetime in an efficient manner.
Make provision for known IHT liability Both for the current situation and the future, possibly by way of an Insurance policy.
Protect your familys wealth By effective use of certain trusts.

So what planning have we got to do once one of us dies?

Deed Of Variation - If no previous planning had been done you need to check to see if a Deed of Variation could be of benefit. This simply allows the Executors to have the deceaseds Will amended, provided all beneficiaries agree.
Minimise future tax liability Where income is a priority for the lifetime of the survivor, substantial immediate Tax savings can be made using an appropriate trust. This is especially useful where a spouse is left on a reduced pension.
Ill Health There are certain plans where the full 7 year timescale for gifts can be reduced, but specialist advice must be taken in these areas.

The whole area of setting up Trusts for Inheritance Tax avoidance is covered by complex rules so you are advised to seek specialist advice if you wish to go down this route.

It all sounds very complicated, how do I start?

You need to do a bit more planning:

Consult an expert on Inheritance Tax.
Check your Will.
Make a list of all your assets.

You have read the best review article categorized by real estate attorney and the title There Is Nothing Certain In Life But Death And Taxes. You can bookmark or spread this post by using this URL https://realestateattorney-tips.blogspot.com/2012/05/there-is-nothing-certain-in-life-but.html. Thank You!