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How to avoid inheritance tax
There is nothing certain but death and taxes, and that HMRC will try to levy this death tax on your estate when you're gone. Make sure you limit the amount of tax your family has to pay.
by Michelle McGagh on May 10, 2012 at 15:17
Although it may seem morbid to think about your own death, having a financial plan in place for after you die is almost as important as having a financial plan when you’re alive.
Inheritance tax (IHT) is one of the most hated taxes because it taxes your loved ones for possessions and investments that you have already paid tax on. But there are steps you can take now to mitigate it in the future.
What is IHT and will it affect me?
IHT is levied on your wealth, or estate, after you die. The tax is 40% on estates over the threshold of £325,000, known as the ‘nil rate band’. Your estate includes any property, possession, money, savings and investments you may have. Assets held in trust and even gifts you made when alive could all be liable for IHT.
Many people think IHT is only paid by the super-rich, but thanks to a decade of unprecedented house price rises even those with modest homes – especially in London and the South East – could see themselves fall into the IHT trap.
Unfortunately the IHT threshold has been frozen until 2014/15 although some argue that if the threshold had risen in line with inflation, each person would be entitled to a £500,000 nil rate band.
How can I avoid IHT?
IHT is an unpopular tax but there are ways to arrange your financial affairs to minimise your bill, or even escape IHT altogether.
You can reduce your estate but making ‘exempt gifts’ including to your spouse or civil partner, as long as they have a permanent home in the UK.
Donating to a qualifying charity, as defined by HM Revenue & Customs, will also take money out of your estate.
Other stranger exemptions include donations to some national institutions, such as museums and universities, and the National Trust. You can also give money to political parties that have at least two members elected to the House of Commons or has one elected member but the party received at least 150,000 votes.
Some estates are completely exempt from paying IHT. Exempt estates include:
- Those valued at under £325,000
- Those where the deceased left everything to a spouse or a qualifying charity and the estate worth is under £1 million
- Those owned by someone domiciled in a foreign country who died abroad and has a UK estate valued at less than £150,000
If your estate qualifies as exempt you will need to fill in HMRC’s IHT205 Return of Estate Information form (known as C5 in Scotland).
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