Will I need to pay inheritance tax before I die?
Much has been made recently of government proposals to force certain people to pay inheritance tax before they die, rather than leaving the financial burden and responsibility to those left behind.
These proposals are currently being discussed, as a direct result of a significant number of individuals using trusts to shield their estates from inheritance tax liability.
At the moment, inheritance tax is calculated on the basis of the value of a person's final estate, at the time of their death. Any value over £325,000 (or £650,000 for married couples) is taxed at 40 percent, unless any reliefs can be applied. It is difficult therefore, to envisage how a value can be calculated whilst they are still alive and it must be stressed that this scheme, should it be applied, would be used only to chase more wealthy individuals suspected of deliberately trying to avoid paying inheritance tax.
It is unlikely that these proposals will affect the average individual who is simply seeking ways to minimise their inheritance tax liability through effective estate planning, but we will of course keep you up to date with the progress of these discussions and what they mean for us all. If you have any questions, contact the IWC inheritance tax team on 0800 612 6105 or 020 8150 2010.
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Avoiding inheritance tax through emigration might not be as far-fetched and extreme as it first sounds.
One couple mentioned in the press in recent days, had moved to Australia. They were advised that if they planned to stay there permanently, they would eventually become Australian citizens – great news, as Australia does not apply inheritance tax to estates.
Generally, UK couples who emigrate are still classed as having a UK domicile within three tax years after they leave. This means that they would still be liable for UK inheritance tax on all assets valued over the nil rate band, should they die during this time.
In addition, if any property remains theirs within the UK, this is classed as being a domicile and the above will apply. Therefore, all ties to assets in the UK must be severed.
Limiting inheritance tax liability has become more difficult since HMRC has launched its campaign to close down many of the usual loop holes and tactics which have in the past, allowed individuals to minimise the amount of inheritance tax which could be applied to their final estate.
Generally, the advice being given is to start planning as early as possible; leaving it until later in life will severely limit your options.
Many more estates are reported as being investigated by the taxman, meaning that any inheritance tax planning must be watertight. There are even concerns that the tax threshold may not just be kept static, but may even be lowered during the next election.
It is more common than one might think, that a beneficiary named in a will, dies before the writer of that will.
In this instance, should the beneficiary have been their adult child, then that person’s claim to the estate is automatically passed to their children. If there are no direct grandchildren in existence (children of the deceased) or the beneficiary wasn’t their child, then any nominated assets are absorbed back into the estate.
Some more detailed wills, anticipate this scenario and add further instructions, often stating that if the beneficiary dies before the person, then their share of the assets will pass to another named individual.
The key to avoiding complications during the probate process is to ensure that the will is drawn up correctly and without ambiguity in the first place. This involves careful wording and additional clauses where necessary.
Although a recent report called for the removal of Business Property Relief for family businesses, the government has refused to alter the way in which Inheritance tax liability is calculated.
Currently, those benefiting from probate by way of a stake in the family business are exempt from paying inheritance tax under BPR rules.
The UK’s Department of Business, Innovation and Skills has argued that by removing BPR, business owners will therefore be encouraged to restructure the business and bring in more revenue for the government.
The government disagrees however, believing that BPR is vital in supporting the sustainability of small, family-run businesses and that it must remain.
Are you the head of a family business? Have you thought about inheritance tax planning and do you agree with the government’s decision?
Despite the suspected economic recession, rise in living costs and freeze on salaries, most of us are still able to retain our homes and assets which means that a high percentage of people will find that they have assets which have pushed them over the Inheritance Tax threshold of £325,000.
If you suspect that this is the case with your Estate (bearing in mind, the value of your home will also be taken into account), then there are ways to bring you back within the threshold, if you act now to prevent the tax man taking 40% of the value of your Estate.
Your first task should be to prepare a Will, if you haven’t done so already. If you’ve had a simple Will prepared without having planned specifically to reduce Inheritance Tax liability, have it looked at again.
It is worth noting that transfers between spouses and formally recognised civil partners are recognised as being exempt, known as the IHT nil-rate band. This means that when the first partner dies, their entire Estate can be transferred to the surviving spouse, without any Inheritance Tax being charged. When the survivor themselves die, any nil-rate band not used when the first partner died, can be claimed.
If you own a business, your next of kin may be able to claim Business Property Relief upon your death. This could mean that if you pass your business assets onto your children, they could claim IHT exemption for up to 100% of the value of your entire business assets.
There are a number of ways to plan effectively to reduce your Inheritance Tax liability simply by planning the content of your Will carefully. A probate expert will outline the choices available to you, which could potentially keep thousands of pounds in your Estate to be passed to your children – not the tax man.