Quote: "No man in this country is under the least obligation, moral or otherwise, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his store" Lord Clyde - 1929 Judgement."Full Article:
Inheritance Tax is not going to affect most people - it's a tax on the rich, right? -
Wrong!
With the recent high rises in house prices many more people, people who would not consider themselves as rich by any other standards, are being brought into the inheritance tax trap.
This is largely because the tax allowances are not rising anywhere near the same rate as price inflation - some would call it taxation by stealth!
For anyone domiciled* in the UK Inheritance tax is taken at 40% of all your net worldwide assets, over and above your personal nil-rate band allowance (£285,000 April 2006). If your domicile is abroad you can only be taxed on your UK assets.
With a bit of tax planning and Will making a husband and wife (or two partners now within the Civil Partnership laws) can aggregate their two nil-rate bands giving a double band exemption (£570,000 April 2006).
Everyone, I'm sure, would like to minimise their
Inheritance Tax liabilities even though this does not
benefit them personally, but it does benefit their
relatives or the eventual beneficiaries of their estate.
Unfortunately, not everyone does for various reasons and
money is paid unnecessarily in tax.
Avoiding or at least minimising the tax through advanced
tax planning is a perfectly legal process so long as you
stay within the legal boundaries - as Lord Clyde
famously said in a 1929 judgement:
"No man in this country is under the least obligation, moral or otherwise, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his store"
Although one can understand the Revenue's antipathy towards the clever accountants and lawyers who develop increasingly complex and devious means of avoidance; one can hardly blame their clients for trying, and recent moves by the chancellor on closing loopholes in this area and retrospective legislation might leave open to question the morality of such a tax hike and some interesting areas for debate on constitutional law?
Landlords in particular are going to be affected by IHT in the future. They invest in property for the benefits it brings both in terms of a steady regular income and capital appreciation. But it's been the success of the latter that has perhaps so benefited the exchequer.
Fortunately for the investor / landlord there are some things you can do to minimise your tax liabilities:
Lifetime Gifts - gifts can be given during one’s lifetime. If they are
not exempt, they are referred to as Potentially Exempt
Transfers (PETs) as they leave your Estate for
Inheritance Tax purposes if you live for seven years
after the gift. Taper relief is available for transfers
made more than 3 years before the date of death provided
the gift would be all or partly subject to Inheritance
Tax. For a gift to be effective the donor must not be
seen to have reserved a benefit (gifts with
reservation).
Tax Free Gifts
Transfers between spouses.
Donations to UK charities, political parties or certain
national institutions.
Annual Exempt Gifts
Annual gift of up to £3,000 to anyone. If you miss
making the £3,000 gift last year, you could gift £6,000
this year. Husbands and wives each have their own
allowances.
Small gifts of up to £250 per person.
Normal expenditure out of income. There is no limit on
how much can be given as long as the gifts meet three
conditions. First, it must be paid out of income not
capital. Second, the gift must not affect your normal
standard of living. Third, the gifts must be regular -
at least once a year. The Revenue may require evidence
that you meet these conditions.
Marriage gifts. You can give up to £5,000 to your own
child on marriage, grandparents can give £2,500 to a
grandchild and £1,000 can be given by anyone else. The
gift must be conditional on the marriage actually taking
place.
Maintenance gifts spent on education or training your
children under age 18 and in full time education. Also
reasonable amounts to support dependent relatives are
exempt.
Reliefs
Business assets
If you are a partner in a business or a sole trader no
inheritance tax would normally be payable if you give
away your interest. This may not apply to cash held in a
business. Controlling interest in an unincorporated
business, or a share in a partnership, or a shareholding
in unlisted companies such as those quoted on the
Alternative Investment Market attract 100% relief,
provided that you have held the shares for at least two
years. 50% relief can be obtained on land or equipment
which is used for a qualifying business. Qualifying
businesses are those carried on for profit, ones which
deal mainly in securities, land or buildings do not
normally qualify.
Agricultural land
This may also attract 100% or 50% relief.
Owning woodlands can effectively postpone paying
Inheritance Tax until the timber is cut or sold.
(Woodland Relief).
Armed Forces
With regards to servicemen or women who die as a result
of a wound inflicted, illness contracted or accident
that occurred on active service are exempt from IHT,
even if the death does not occur immediately.
Pensions
Company and Occupational pensions often provide
death-in-service benefits of up to four times your
annual salary. On death before taking the benefits the
money would normally be passed to the member’s spouse,
thus increasing his or her potential liability to
Inheritance Tax.
The pension Trustees could pay out to others, say his or
her children, if the member informs the Trustees of his
wishes. A discretionary or flexible trust could receive
the money with the surviving spouse being only one of
the beneficiaries.
The same kind of procedure can be used to exclude your
pension fund from your Estate for personal stakeholder
pensions.
Life Assurance Policies
Term assurance can be purchased to cover Potentially
Exempt Transfers against the event of the donor dying
within seven years of the gift. A seven-year term
assurance policy in trust would provide funds to pay the
tax bill on death.
Whole of life policies in trust can be used to cover all
or part of the tax liability on death.
Annuities can be used to provide incomes to pay for
whole of life policies in Trust. The purchase price of
the annuity would leave your Estate immediately. The sum
assured of the whole of life policy is outside your
Estate as it is in trust.
Should you buy a Long Term Care, Immediate or Future
Care Plan for a single premium, this will leave your
Estate immediately.
Trusts and Wills
A Trust is set up by someone (the Settlor) gifting
assets to Trustees who now legally own the assets and
which they hold on behalf of persons who the Settlor
wants to benefit (the Beneficiaries). The Trustees must
always act in the best interests of the Beneficiaries
and are controlled by the terms of the Trust.
There are several classes of Trust, each class being
taxed differently.
Trusts offer the opportunity to reduce the potential
liability to Inheritance Tax. They can be created during
your lifetime or on death using your Will.
There are a number of advantages in using Trusts. A
Trust could do some or all of the following for you:
Any increase in capital within the Trust would be
outside your Estate for Inheritance Tax purposes
provided that you (the Settlor) are specifically
excluded from benefiting from the Trust.
Some Trusts allow the Settlor to enjoy an income from
the Trust.
After seven years all the original investments into the
Trust could be outside your Estate for Inheritance Tax
purposes.
Some Trusts have the effect of removing some capital
immediately from the Settlor’s Estate.
Trust assets can be paid out to the Trustees before
Probate is granted.
Foreigners owning offshore assets can set up Trusts to
protect them from being liable to Inheritance Tax.
Through a Trust you can control who receives the capital
and income and when it is received.
Trusts are often regarded as being more certain than
Wills if the Trustees are chosen carefully, as Wills are
more likely to be challenged or could be changed by
using a Deed of Variation.
Wills
It is advisable for each individual to make a Will in
order to utilise their nil-rate band effectively. For
married couples, it is worth considering bequeathing up
to the nil-rate band to children/grandchildren rather
than to each other. This can have a potential tax saving
of £114,000.
Deed of Variation
Currently it is possible to alter Wills after death by
means of a Deed of Variation.
This can be used for IHT purposes. For example, a parent
inheriting assets might wish them to go to the children
directly or a rich son might want his less well-off
sister to have his inheritance. The Deed can work even
if someone dies without having made a Will (Intestate).
The Deed has to be effected within two years of death.
If the Deed is done for tax purposes the Inland Revenue
Capital Taxes Office must be informed within six months
of the Deed being set up. You cannot always set up a
Deed of Variation and it may be that legislation may
restrict the use of Deeds of Variation in the future.
Gifting your Home
This will not work for Inheritance Tax purposes, if you
continue to live there as it would be regarded as a
‘gift with reservation’. However Equity Release Schemes
could offer scope to reduce the Inheritance Tax problem.
Capital Gains Tax
You do not pay Capital Gains on your assets when you
die.
How Much Tax
Estate Tax
£285,000 nil
£300,000 £6,000
£400,000 £46,000
£500,000 £86,000
£750,000 £186,000
£1,000,000 £286,000
£2,000,000 £686,000
The information contained within this page is based on
our understanding of current tax legislation, which may
change in the future. No responsibility can be accepted
for action taken based on this information.
To obtain advice on how to reduce your liability to
Inheritance Tax contact us on 0800 99 88 33 or complete
this online form
* Your domicile is where you live and have your main permanent - it's not the same thing as your nationality. It is not possible to have more than one domicile - it's a complex area and you are advised to seek professional advice.
