The Inland Revenue has had some high-profile headlines of late. There was the case of the eBay trader who has been sentenced to prison for tax evasion. There are proposals to allow the Inland Revenue to reclaim unpaid taxes from ISAs. Now the Inland Revenue appears to have Inheritance Tax planning in its sights. The common factor in all of this, however, is that the Inland Revenue is targeting large-scale and arguably fairly blatant tax evasion, rather than legitimate tax planning.
Inheritance Tax – a controversial reality
Inheritance tax in its current form was introduced in 1986. The current nil-rate personal IHT band of £325K (£650K for couples) was introduced in April 2009. To put its effect into context, the House Price index shows that in April 2012 the average house price in the UK was £229K whereas in April 2014 it was £260K .If house prices continue to rise and the IHT nil-rate band stays the same then increasing numbers of home owners are going to find their IHT-free allowance being consumed, wholly or in large part by the family home.
A little forward planning can make all the difference
If you’ve managed to stay on top of the family finances, made savings, and taken appropriate investment decisions, then you may have a nest egg you’d like to pass on. Fortunately there are various and perfectly legal, options to reduce an IHT bill and thereby increase the value of the estate you leave to your loved ones.
Marriage and civil partnerships can reduce tax bills
Couples in committed relationships can reduce their IHT liability by formalising them either by marriage or by a civil partnership. This has the advantage that the surviving partner inherits any unused portion of the deceased’s tax-free allowance. Specifically they inherit the unused amount as a percentage, meaning that if the nil-rate band is eventually increased they and their family will benefit from the increase.
Put your trust in a trust
Life insurance is for those you leave behind. If the policy is put into a trust then the eventual pay-out is treated separately from the rest of the estate. This means the proceeds can be received free of inheritance tax. It can also be released much more quickly than the rest of the estate which has to go through the process of probate. This can help to cushion the financial shock of bereavement allowing those left behind to focus on managing their grief and moving
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AdviserPost Blog Content on. There are a number of different trusts and it’s sensible to get some unbiased financial advice from a professional financial adviser on this.
Give while you are still alive
Inheritance Tax, by definition, only applies to the value of the estate you leave behind when you die. Therefore reducing the value of your estate reduces the cost of any eventual IHT bill.
There are a number of rules regarding how much of your property can be gifted away in any year and guaranteed to be free of Inheritance Tax in the event of your death. It is, however, worth remembering that any gift becomes absolutely free of Inheritance Tax provided that the donor lives another 7 years after giving it. Even if the donor dies within this time, the Inheritance
Tax liability may be reduced. It is important, however, to note that to qualify as a gift the donor must surrender all interest in the item gifted.
Reducing your potential IHT bill needs careful thought. For people getting some unbiased financial advice from a professional financial adviser this could make a huge difference in terms of how much of their personal wealth reaches their loved ones as opposed to the government.
eBay trader story https://www.accountancylive.com/millionaire-ebay-trader-jailed-%C2%A3300k-tax-fraud
HMRC Bank Accounts http://www.theguardian.com/politics/2014/jul/08/hmrc-under-fire-over-access-to-bank-accounts
IHT crackdown story http://www.accountingweb.co.uk/article/hmrc-plans-crackdown-inheritance-tax-avoidance/562691
IHT history and bands official version http://www.hmrc.gov.uk/rates/iht-thresholds.htm
IHT introduction and bands easier to read version http://www.inheritanceissues.co.uk/hisotry-inheritance-tax-uk.html
Housing data http://ons.gov.uk/ons/dcp171778_373873.pdf
Overview of exemptions