How to soften the blow of inheritance tax
When it comes to the much-dreaded 40% ‘death tax’, many people are worried about leaving their loved ones with a sizeable inheritance tax bill when they’re gone.
Luckily, there are a number of perfectly legal ways to soften the blow, especially if you plan ahead.
Spend it!
There is the old adage that you can’t take it with you… You’ve worked hard your whole life and you may as well enjoy it. Take a holiday, treat the family, eat in some great restaurants… HMRC will be subsidising your expenditure by 40%! But if that’s not an option:
Gift your money
Legally, you can gift up to £3,000 per year, and can also make smaller unlimited gifts of £250, both free from inheritance tax.
You can also contribute to the living costs of an older or even younger relative as well, although you must be able to prove that such money has come from surplus income, which means that the money would have to have been sitting in your bank account otherwise.
You are also free to gift money of any amount to other people as you see fit, but any such gifts fall under the 7-year rule, which means that if you survive for 7 years after the gift was made the money is then considered to be free of inheritance tax.
If you should die before the 7-year period then inheritance tax will still apply, although you may be able to benefit from taper relief if you’ve made substantial gifts during this period.
Trusts
Even with a trust, you are still technically giving money away, and for that reason, the 7-year rule mentioned above still applies, but this is widely considered to be a sensible way of passing money on to a family member.
Two simple forms of trust are a ‘bare trust’ and a ‘discretionary trust.’ A bare trust transfers absolute ownership to the beneficiaries, but simply held by someone else.
A discretionary trust provides flexibility which can allow you to tailor the conditions to suit both the family set up and the circumstances.
Trusts are considerably more complicated than a direct gift but with proper advice in place they can provide a very considerable tax shelter.
As with all complicated legal matters, it makes sense to work with a qualified tax advisory firm who specialises in the issue you’re dealing with and at Fusion Partners we deal with trusts on a daily basis to ensure that clients and their assets are protected.
Other Planning
There are a number of other solutions which can help mitigate or eliminate inheritance tax in the right circumstances. If you want to find out more, please get in touch with us today.
Some advice please. My late father did not benefit from the rental income of another property he owned since he made a will in 2013 (rent: circa.£8k per year cash) but instead he used to give all income from the rent to his 3 grandchildren who are the beneficiaries of that property. However, he continued to pay tax on that income and was declaring it on his tax return.
Because my late father did not benefit from a gift/other house but beneficiaries/grandchildren, should IHT due be calculated at a reduced rate as the years between gift and death were 5-6 years and the IHT rate should be 16%. If so, is 16% applicable to the whole estate or just that particular asset?
Should this house be counted/included in his estate for IHT purposes? As the value of the house exceeds £150k Can this be treated as specified transfer/excepted estate?