Citywire for Financial Professionals
Share this page:
Stay connected:

Citywire printed articles sponsored by:


View the article online at http://citywire.co.uk/money/article/a588211

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

How to avoid inheritance tax

The problem with financial planning is many leave it too late; this is the case with wills, lasting power of attorneys and of course, inheritance tax.

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).

Sign in / register to view full article on one page

45 comments so far. Why not have your say?

Andrew Baird

May 10, 2012 at 18:01

What about AIM shares....??

report this

Erick Davidson via mobile

May 10, 2012 at 18:03

Why no mention of AIM shares, forestry, farmland, EIS schemes etc?

report this

RL

May 10, 2012 at 18:17

Take care. I thought tax avoidance was now a dirty word. You guys won't be on David Cameron's dinner party list.

report this

Jonathan Gain

May 10, 2012 at 18:53

Business Property Relief, or Business Relief as HMRC now call it, should be much more widely used. It provides greater flexibility, the client keeps control of assets and IHT exemption is achieved after 2 years. The products on the market are generally asset backed such as forestry or farming and for AIM investment you can even get insurance policies to protect the sum invested.

report this

Alan Phillips

May 10, 2012 at 18:54

I do not mind paying most taxes but really object to my family after my day having to pay double tax on my assets really to keep the idle sitting in pubs all day.I know of many people on all the benefits---sickness,invalidity.incapacity,car and carer allowance and there is nothing wrong with any of them.It is a far better"living" than working.That is where the inheritance tax goes.

report this

Deliberating Investor

May 10, 2012 at 18:56

Andrew Baird

It is not all AIM shares only qualifying ones and I think it means they cannot be property shares, but one has to look up the reference. I have 2 in my portfolio

James Halstead Plc (JHD) flooring mfghrs and Nicholls Plc - the manufacturers of the red drink Vimto and other soft varieties.

report this

snoekie

May 10, 2012 at 20:34

Actually Michelle, some will pay 56% on money they earned, just because they lived beyond 75. That is agism and discrimination and illegal,but then that means that in addition to to the expenses frauds, all MPs are ignoring laws they or their predecessors passed.

As it is double taxation, the inflation rate to the free element should be stringently enforced and back dated (to say 1997), as should the levels of pensions paid the PS retirees, and back dated and clawed back, so this would mean that the true threshold would in the region of £500 k.

report this

The Wills Man

May 10, 2012 at 21:46

Its always worth getting specialist advice - there are lots of issues not covered in this short article.

There are still some very simple ways of avoiding IHT that would work for the majority of people - if only they could be bothered to do it!

report this

John Smiley

May 10, 2012 at 22:39

Is the following (see above) really correct? Surely if the money has been given away as a PET, it won't be available to pay both the donee's liability and also the estate's liability. This would suggest that a gift from someone who dies within 3 years could suffer 40% in the estate and the donee would have to pay 40% as well!

''Remember that if a PET fails (in other words you die before seven years is up) it is effectively taxed twice. Not only does the recipient of the gift get taxed but the PET is also added to the overall total of your estate for IHT calculation purposes.

report this

Cape Town

May 11, 2012 at 07:08

@Mr Wils Man

Would you be able to share some of these simple devices? Do you mean settig up trusts?

report this

The Wills Man

May 11, 2012 at 09:41

@Cape Town. Trusts are just one tool, albeit a very effective one, at avoiding IHT. I would share these tips, but like most things to do with estate planning what is good for one person is not so good for another. I earn my living by advising people on these matters so I'm not going to provide a list here, but I am willing to arrange a private consultation.

@John Smiley. I give £100,000 to my nephew but die within 3 years. As my estate is over the NRB £40,000 of that gift is clawed back as IHT on my estate. My nephew dies after me and therefore HMRC only consider £60,000 to be his; however, if my nephew predeceases me and his estate is over the NRB then £40,000 of the £100,000 is payable by his executors, AND another £40,000 is chargeable to my executors on the same £100,000 gift, BUT my nephews executors can claim back £16,000 (40% of £40,000) under double taxation rules. HMRC still get 66% tax on the same £100,000 (£66,000)

All the above proves that IHT mitigation, which is perfectly legal AND moral for taxpayers, needs careful consideration and expert planning.

report this

Paul Eden

May 11, 2012 at 10:05

Pension funds can be treated as being outside an estate. A death benefit nomination should be filled in explaining how such funds should be dealt with in the event of death before retirement.

Alternately the pension scheme trustees may pay death benefits into an estate where they would incur the 40% IHT.

JOURNEY 2 - MYSTERIOUS...

£14.99

Free P&P

Clarkson Powered Up...

£1.99

report this

John Smiley

May 11, 2012 at 21:00

To the Wills Man: Many thaks for your explanation which I totally understand. I had completely misunderstood the original point.

report this

PA

May 12, 2012 at 01:37

My lawyer friend says that it is incorrect to say that receiver of failed PET has to pay IHT. He suggests that failed PET reduces the IHT allowance of donor's estate and executors of the estate are responsible to pay it out of the residual estate. Will like to hear further informed views on this ?

report this

simon corkswill

May 12, 2012 at 09:06

The major problem that most face is the property value , is there anyway around that ? Bar giving away freely and one hoping you do not get evicted or two die before the exemption kicks in ?

report this

Dennis .

May 12, 2012 at 09:07

I once went to an IHT planning seminar and it opened with the comment that "ladies and gentlemen, the first thing to say that this is really not your problem"

Actually I like Warren Buffet's view which is to leave enough to his kids so that they can do anything but not enough that they can do nothing.

report this

The Wills Man

May 12, 2012 at 10:44

@PA. Your friend is correct - the executors have to pay IHT. The effect however is still the same ie 40% of the value of a PET is lost to the estate.

@simon corkswill. You cannot "give away" your house and still reside in it - this is a reservation of benefit unless a commercial rent is paid. There are many other risks with doing this and no benefits at all for IHT purposes. The better, and safer, way is to raise a debt against the estate - but caution and expert advice is always needed.

report this

Franco

May 12, 2012 at 12:50

What about agricultural land, forest land, etc? IHT is still a voluntary tax.

report this

Jonathan

May 12, 2012 at 13:06

Buy a farm or a forest like the city boys do, there is zero inheritance tax payable on these and partly for this reason they have excellent resale values too.

report this

JETTE BARTON

May 12, 2012 at 16:39

Am I correct n asssuming that if,say,the husband dies leaving say 100.000 to his wife there is no tax to pay and that the difference between the 100.000 and the allowance figure of 325.000 is added to his wife's allowance of 325.000 making her allowance when she dies effectively 425.000?

Alos, it should be noted that motor-cars are exempt from IHT so buy a couple of Jaguars just before you pop off.

report this

JETTE BARTON

May 12, 2012 at 16:41

SORRY------THE LAST FIGURE SHOULD BE 550.000 NOT 425.000.

report this

Malcolm Burnard

May 12, 2012 at 19:52

Why not distribute any excess amount of the value of your estate to your children. As I understand it as long as you live 7 years from the date of giving the recipents pay no tax. Perhaps the other alternative is leave the country if you are not patriotic!

report this

Anonymous 1 needed this 'off the record'

May 12, 2012 at 20:15

Malcolm, doesn't this assume that you know your date of death? Otherwise you could just distribute it in cash so that there is no paper trail.

report this

Dennis .

May 12, 2012 at 20:20

The best one I have come across is that you marry your son's fiancee, transfer your goods to her then arrange a divorce the next day and then she gets married to son and transfers wealth to him. Voila! wealth transferred. Job done.

report this

Alan Phillips

May 12, 2012 at 20:26

Keep putting £3 grand for each of your children in accounts each year,if you are 50 and lucky enough to live 30 years it will be £90 grand per child.They can gift you the interest each year.If you have 3 children that is £270000 which does not go for inheritance tax. 40% = £108000 less for politicians to waste and a nice nest egg for your children.

report this

simon corkswill

May 12, 2012 at 20:43

The wills man , that is correct , however in these times where one is encouraged to look after ones family the solution is at hand .

report this

Dennis .

May 13, 2012 at 09:11

Alan, i thought you could gift only £3K /annum in total, not per person unless it comes out of income rather than capital.

report this

Alan Phillips

May 13, 2012 at 10:10

Is that correct I always thought it was per person but I may be wrong as I am not a lawyer.Say for example if I had two children and my wife and I put £3 grand per year to each one.Do you know if this is within the law.Thanks for the information Dennis.

report this

Dennis .

May 13, 2012 at 10:52

It's per person so your wife can also give £3K per year too. The number of recipients is not relevant otherwise you could give give all your money away to your relatives etc. The idea is that you can't impoverish yourself by giving your assetts away and then falling back on the state for support. Similarly you can only give surplus income away which does not affect your standard of living. If you do the latter it's best to do it by standing order from a current account to keep an audit trail.

report this

Dennis .

May 13, 2012 at 10:56

I once asked the question as to who is going to know about what money you have given away etc and the response is that the executors are legally responsible for any tax so the next time a relative asks you to be an executor think twice about what you might know about their affairs.

report this

Scorpio15

May 13, 2012 at 18:28

How can I contact the Wills Man if I want him to check my Wills? I am responsible for looking after my family and I am not sure if my Wills done a few years ago and in order. Please help.

report this

The Wills Man

May 13, 2012 at 23:02

Scorpio15.

You can contact me via my personal email cliveoram@gmail.com

report this

Alan Selwood

May 13, 2012 at 23:37

£3,000 gifts: Each donor (person making a gift) can give away £3,000 p.a. in total under the "£3,000" heading, split between any number of people, PLUS £250 p.a. to any person who does not receive part of the £3,000, PLUS gifts 'in anticipation of marriage' of between £1,000 and £5,000 depending on closeness of relationship. Obviously, both members of a married couple could do all of these, each year. As gifts between UK-domiciled spouses are exempt, you do not need to take any of those allowances into account when making gifts to each other!

report this

mason

May 14, 2012 at 00:55

Can someone tell me an simple legit way to record, that would satisfy HMR, that I have given my daughter 3k for last yr and 3k for this year, ( not done as yet ) I assume the years starts 5th April.

report this

mason

May 14, 2012 at 00:58

ps. do I actually have to record these 3k annual gifts to my daughter ?

report this

Alan Selwood

May 14, 2012 at 09:11

Revenue & Customs are vague on this point.

Perhaps a record of such transactions (amount, date, beneficiary, type of IHT exemption intended) could be given to your executors for safe keeping with the will? And/or give a signed and dated letter to the beneficiary, asking her to bring the details to the attention of the executors if less than 7 years elapse?

report this

Alan Selwood

May 14, 2012 at 09:13

P.S.

The tax year starts on 6th April, not 5th April.

report this

Dennis .

May 14, 2012 at 09:52

Mason Actually how would anyone know that you daughter (or anyone for that matter) received money from you? She would not be asked to declare anything on the off chance that she has received money and you would not be in a position to blow the whistle as you would be dead.

report this

Alan Selwood

May 14, 2012 at 10:40

Dennis:

1. The idea of documenting the exempt gifts of £3,000 is to prove that when that amount left the estate it became exempt from IHT. Since PETS (potentially exempt transfers) are liable to IHT on death of the donor within 7 years of the gift, it's helpful to be able to prove that the £3,000 gifts were annual lifetime gifts and therefore instantly exempt from IHT.

2. The argument that 'nobody would ever know' may be valid in practice, but just suppose that the Revenue & Customs felt suspicious about the donor and his transactions over the years. It's not inconceivable that they might then want the executor to establish proof of exemption from IHT on all sorts of payments out of the estate within the previous 7 years before signing off probate. That would be both tedious and expensive. Much better to have proper records.

report this

Dennis .

May 14, 2012 at 12:07

alan, I take the point but in reality are you saying that HMRC could make the executors contact every bank/building society in the country (and beyond) and request details of any accounts that the deceased may or may not have had over the past 7 years? You are asking to prove a negative which is not possible.

report this

The Wills Man

May 14, 2012 at 12:41

@Dennis

This is the same as a tax investigation. The executors have to prove that no IHT is payable, not HMRC prove that it is.

This seems strange to most who assume that "innocent until proved guilty" is the rule - but not so with the Taxman!

Executors are responsible for providing detailed accounts of the deceased including any payments over £3,000 for the previous 7 years.

This should serve as a warning for us all - keep detailed accounts of all gifts, however small. For large payments, (over £3,000), get a written receipt to acknowledge that it is a gift and not a loan.

report this

Alan Selwood

May 14, 2012 at 12:55

The point of this topic is saving IHT, and this part of the thread relates to acceptable documenting of annual gifts under the £3000 exemption so that when the donor dies, evidence is available of the validity of the gift for exemption purposes.

On a more general note, HMRC staff have to approve the tax filing from the executor before they will allow grant of probate. In cases of suspected fraud, they can ask for evidence going back far longer than 6 years, and of course often banks etc will have shredded files that were finished with more than 6 years previously. So then the poor executor may have to accept an unduly high estimate of tax due.

Good documentation is recommended, therefore.

report this

Dennis .

May 14, 2012 at 13:06

As I said earlier, being an executor can be fraught with difficulties.

report this

mason

May 14, 2012 at 20:19

Thanks all very interesting and helpfull, I will have daughter make up recipts for all previous cash gifts.

report this

SD

May 17, 2012 at 12:20

The Wills Man (12 May) is incorrect in saying that the personal representatives are liable for tax on a failed PET. IHT on a failed PET (i.e. where the donor dies within 7 years of making the gift) is payable primarily be the donee. It is only if the donee does not pay the IHT within 12 months after the end of the month in which the donor dies that HMRC will seek to obtain payment from the personal representatives. See section 204(8) IHTA 1984.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

Sponsored By:

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Latest from Investment Basics

Sorry, this link is not
quite ready yet