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UK Inheritance Tax World
Research the whole taxation gamut, from capital gains tax to UK inheritance tax.
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Inheritance Tax Planning
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Here are a few simple steps which one might take in order to reduce or eliminate a tax charge:
1. Make Sure that your Will is Written Tax Efficiently.
Everybody has an allowance below which inheritance tax is not chargeable and therefore a married couple currently have allowances totalling £550,000. However, if an allowance is not used it is lost. For example if in their will a spouse leaves 100% of their estate to the surviving spouse, as is often the case, one allowance is lost and the cost to the children is potentially £110,000. To prevent this happening you might consider rewriting your will leaving assets up to the value of the nil rate band directly to the children; alternatively into a discretionary trust. In this respect it is important to ensure that you have assets in your sole name to facilitate this. Jointly held assets would pass automatically to the survivor.
This is a simple yet most effective way of reducing the tax charge however professional financial advice should always be sought to consider how it might effect you and your spouse personally, ie ensure first and foremost that the surviving spouse has sufficient income and capital for their own needs.
2. Use your Remaining Allowances Effectively by Making Gifts
The following are examples of gifts which are tax exempt
a) Gifts of up to £3,000 in any one tax year. If any of this allowance is unused it can be carried forward into the next tax year.
b) Gifts of up to £250 to as many people as you wish but such gifts are only exempt if the total given to one person in a given tax year does not exceed £250.
c) Gifts that are part of your normal expenditure and made out of your income.
d) Wedding gifts up to the following values:
Children £5,000
Grandchildren £2,500
Anyone else £1,000.
e) Gifts to UK based charities, museums and similar other bodies.
3. Make Larger Transfers of Capital
The Inland Revenue will permit the transfer of limitless sums to UK based individuals and these transfers of value – known as Potentially Exempt Transfers (PETs), are inheritance tax free seven years after their being made. During the interim years the tax charge may, depending upon individual circumstances, also fall. Hence, it is important that such transfers are made as early in life as possible. However, equally, you need to ensure that, in making PETs, you are at a stage in life when you can reasonably judge how much you can afford to give away without depriving yourself of the lifestyle which you would like.
4. Make use of Trusts
a) Nil Rate Band discretionary Will trusts are a very common form of trust. Rather than transferring assets up to value of the nil rate band, currently £275,000 (see above), directly to their beneficiaries at their death, an individual can leave money to such a trust. They are an ideal vehicle for circumstances whereby perhaps minors are potential beneficiaries; alternatively where beneficiaries already have an inheritance tax problem of their own and for them to receive money directly would only make their position worse.
b) There are other forms of specialised trusts which can be used depending on your circumstances. The ones most commonly used are interest in possession trusts, discretionary trusts, life interest trusts and accumulation and maintenance trusts (a form of discretionary trust often used in connection with school fees planning)
A variation of one of these trusts can be used whereby future access to capital at set times may be useful. In that the generally held viewed by many is that once gifted it is totally impossible for money to be used by the donor, this trust is of particular interest to many people.
IMPORTANT:
Professional advice, both legal and financial, is essential when one is dealing with any of the above trusts and issues. Some of the above areas can be complex and difficult, especially when dealing with large sums and estates. To assist we have identified expertise willing to provide basic guidance. See the final section:
Hopefully, this will help you obtain a firm footing with respect to the whole inheritance tax issue.
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