When you die who do you want to benefit from your Will? Your nearest and dearest or the taxman? Inheritance Tax (IHT) is charged at 40% on everything over the ‘nil rate band’, which is currently set at £325,000 and which will remain at that level until April 2018. This is a hefty chunk of your estate to see disappearing into the coffers of HMRC. Gifts made in your Will to your spouse/civil partner and charities are free of IHT but this is not so for other beneficiaries. Wills & Tax partner Lee Young says,”There are several ways that this crushing ‘death tax’ can be mitigated, the first and most important is to have a valid Will to ensure that your assets are passed on as you would wish.”
Lifetime gifts – you can gift up to £3,000 a year free of IHT (or £6,000 if you didn’t make a gift of this kind in the previous tax year). You can make small gifts to any number of people of up to £250 every year (this cannot be combined with the £3,000 exemption). Parents may give £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can give £2,500 and anyone else can give £1,000. You can also give away up to 100% of income provided it does not affect your current standard of living. Gifts to registered charities and some political parties are exempt.
The seven year rule – you can make tax free gifts (known as ‘potentially exempt transfers’) but you must survive for seven years afterwards.
Set up a trust – if you put assets into a ‘bare trust’, where the beneficiary is entitled to them at the age of 18, this will also count as a potentially exempt transfer. More complicated trusts inevitably have more complicated rules attached to them.
Business property relief – holdings of shares on the Alternative Investment Market stock exchange are free of IHT after two years. Other trading business interest can also be relieved form IHT.
Farmland – this qualifies for a relief of up to 100% after two years of ownership. However, the land must be worked as a commercial business. Insurance – take out a whole life policy that could be used to pay your IHT bill. The policy should be held in trust to avoid the proceeds going into your estate (which would otherwise increase your IHT liability even more).
We have offices in the Christchurch, New Milton and the New Forest. Our Wills & Tax team also cover Bournemouth and Poole. For a free initial chat, please call 01202 499255 and Lee or a member of the team will be happy to discuss any questions that you may have regarding making a Will or estate planning.