There is good reason why Inheritance tax is deemed the most unfair tax obligation. A person that has accumulated wealth for which they have already been taxed throughout the course of their life, is then death taxed again, at the rate of 40% (for anything above the IHT nil band rate).
After making national insurance, income tax, capital gains and VAT contributions, the Government then subjects any estate above £325,000 (at the time of writing) to inheritance tax which means loved ones of the deceased do not receive their full entitlement.
Inheritance tax maybe unfair but it is unique it that there are many exemptions and completely legal methods to avoid it. IWC are specialists in will writing, inheritance laws and probate, we can offer tax advice and guidance, suggesting legal ways to offset the liability of your estate.
Planning and preparation is the key to avoiding inheritance tax and we can assist you with the following:
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Here are 4 examples of ways which you can avoid the amount of tax your estate is subject to. Demonstrating how you can ensure that your loved ones receive maximum benefit from your life`s work, rather than the Government.
Immediate Post Interest Trusts
The amount that exceeds the NBR passes to an Immediate Post Death Interest trust for the benefit of the spouse. Due to the spouse exemption rules there is no IHT to pay on first death. Over the next few years the Trustees can use their advance powers to pay monies from the IPDI to Pilot Trusts, set up when the will was made. Provided the second spouse lives more than 7 years from the date of the transfer of funds, the money escapes the Potentially Exempt Transfer rules. Thus, it is not recalled into the second person`s estate.
Sell and Rent Back
Say you own a £1 million property; your children could buy this from you at the full market value. You would then pay them a commercial rent for living in `their property.` You could calculate your own life expectancy and pay them a lifetime of rent using the money they paid you. You would then use your own allowances to reduce the size of your cash assets and thus avoid the tax. The money that the children receive will of course be subject to Capital Gains Tax (CGT). However, this would be far less than an IHT bill they`d receive for a £1 million house.
Sell to Spouse
One spouse sells their half of house to the other, in exchange for an IOU Promissory note. There is no CGT between spouses but there will be Stamp Duty Land Tax for the transaction. The IOU note is then gifted to the children with a life interest for the other spouse. This gift is CGT free as it is not actually worth anything. When the first spouse dies, the estate passes the other and none of this nil rate band is utilised. When the second spouse passes away, the estate goes to the children. There are now 2 nil rate bands to utilise and the last surviving spouse only owns half of the house.
Gift property to children
This example only works well if your children live with you, otherwise the CGT implications may exceed the tax reduction. The solution is to gift one half of the property to your children. The important part is to ensure your children go onto all utility bills, otherwise when you pass away the Inland Revenue will argue that you created a gift with reservation.
It is possible to reduce the inheritance liability after death with a Deed of Variation. Estate administrators or executors can prepare and sign a document to alter the distribution of an estate to mitigate tax. This is not a solution and should not be relied upon because everyone affected must agree to the changes.
This is meant to be generic information not individual tax advice, if you would like us to help you reduce the inheritance tax obligations for your family, call one of specialists advisors free on 0800 612 6105.