Inheritance Tax Planning

Inheritance Tax Planning
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Effective inheritance tax planning has the potential to help save an individuals surviving family members a lot of money, amounts that can vary based on the size of the individuals estate. At its most basic level, inheritance tax, commonly referred to as simply IHT, is the tax owed on their estate should they pass away if the amount their estate is worth passes a certain amount barrier.

Inheritance tax, at the time of writing, is owed on any estate that is worth over £325,000 (although this doubles to £650,000 for married couples and civil partners) at a rate of 40%. As of 2010/11 however, the minimum value is set to rise by £25,000 each to £350,000 (or £700,000 for married couples or civil partners). Should the amount of an individuals estate (which includes their house), surpass the £700,000 they will be required to pay 40% tax on anything over this amount.

If an individual doesn’t use proper tax planning, the majority would die leaving a significant tax liability to their beneficiaries, significantly decreasing the actual cash value of what is being passed on to the beneficiaries. The actual contents of the “estate” is generally considered to be anything that is held under their name, whether that be theirs alone or jointly with someone else as well as assets which may be held in a trust but which they continue to receive income. The only costs that are offset against an individuals estate are any debts currently owed, including mortgages, loans, unsettled bills. However, they can also claim back against any costs incurred during the individuals lifetime but that have yet to be settled, for example funeral bills.

Many individuals make donations or gifts of sums of money to others but obviously if they knew they were going to die, they could just hand off all their wealth to a relative or beneficiary and avoid paying inheritance tax. As a result, this gift can only be exempted from taxation rules if the person making the donation survives for a minimum of seven years after. These kinds of donations are known simply as “potentially exempt transfers” and are an important tool in the tax planning process. Similarly, any deposits into a “bare” trust (one that can only be accessed by a recipient when they reach the age of 18) can be a potentially exempt transfer so through this technique an individual is able to put money aside for grandchildren on the basis that they would be unable to access it until they reach that age.

In contrast, the majority of other trust deposits are considered to be chargeable lifetime transfers with a minimum threshold based on the tax but with any deposits over this being taxed at 20% with an additional 20% owed if the donating individual dies within seven years. There are several types of cash gifts that are tax-free, for example monthly payments to family members assuming that this is only a smaller percentage of their income.

In the majority of circumstances, inheritance tax must be settled within 6 months from the last day of the month of which the individual officially passes away. If they fail to do so, they are required to pay the full amount plus interest although tax on certain assets for example property, can be paid in installments over 10 years.