Inheritance Tax Planning

Inheritance tax is avoidable and intentionally so. Square One can help you find legal ways to avoid it. As a first step, you should remember that you may not even have to pay inheritance tax, if the total value of your estates is below the current inheritance tax threshold. 

If you are concerned that inheritance tax might be payable once you die, understanding the basic concepts of inheritance tax and financial planning is essential. Square One can give you professional advice, tax planning guidance, and help you find legitimate ways to avoid paying too much.

What is Inheritance Tax?

Inheritance tax is a tax charged on the estate when somebody dies. The amount of inheritance tax will depend on the total value of the estate. If there is inheritance tax to be paid, it is payable within six months of the end of the month in which the death occurred. Tax on land and building can be paid in instalments over ten years, unless the asset is sold, in which case you will have to pay after the sale.

How is the tax calculated?

To find out if inheritance tax is payable, you will first have to value the estate. A person's estate includes assets (such as property, investments and other possessions), the estate's share of jointly owned assets and some assets held in trust. From this total value you will have to deduct any debts, such as mortgages, unpaid bills, or funeral expenses.

Inheritance Tax Threshold

While the inheritance tax rate is 40%, you will only have to pay if the value of the assets reaches a certain point. The current threshold for the 2011-2012 tax year is £325,000. This means that for example on an estate worth £300,000, you won't have to pay any inheritance tax, while on an estate worth £400,000, the excess (£75,000) will be taxed at 40%.

Since 2007, married couples and registered civil partners automatically obtain the unused proportion of their partners' allowance on that partner's death. One partner will not only have the right to leave as much to the surviving partner as he or she wants, but the second partner will also be able to use the deceased partner's allowance in addition to his or her own. This means that when the second partner dies, he or she will be able to effectively leave twice as much without any Inheritance Tax to be paid.

Avoiding IHT – Inheritance Tax Exemptions

While many people are familiar with the concept of gifts, there are some other ways to avoid inheritance tax. Square One can help you find the easiest and most suitable way to minimise the amount of IHT to be paid.

Spouse or civil partner exemption – Inheritance tax won't be payable on anything you leave to your spouse or civil partner, even if it's above the IHT threshold. If you are not married and have not gone through a civil partnership, gifts to your partner won't be exempt.

Charities, political parties and certain institutions – You can leave money or assets to charities, major political parties, and some institutions, for example museums or galleries, and they will be exempt from inheritance tax.

Inheritance Tax Trusts – Some IHT trusts will enable you to be exempt from IHT after seven years, but will still allow you access to your capital. They can also work well if you are willing to make gifts, but fear that the recipient may lose the capital.  This trust can be closed in favour of the beneficiaries at any time, unlike the discounted gift trust sold by many providers.

Potentially exempt gifts – If you make a gift to someone, and survive seven years after making the gift, your gift will generally be exempt from inheritance tax, regardless of its value.

Gifts up to £3,000 annually – You can give £3,000 away each year, as a single gift, or as several gifts, and carry over any unused allowance to the next year.

Small gift exemption – You can make gifts of up to £250 each tax year to as many people as you want and they will be exempt from IHT.

Wedding gifts – Wedding gifts of up to £5,000 to your children, £2,500 to your grandchildren or £1,000 to anyone else getting married will be exempt from IHT.

Business Property Relief – It is possible to invest in certain assets including, for example, shares listed on the Alternative Investment Market. After being held for two years, there is no inheritance tax. This strategy however, is also quite risky, as these shares may be volatile and there may not be a market for them when you want to sell. However it may be a good way to deal with situations where there is little prospect of survival by seven years.

Finally, start working on your estate preservation and do something about Inheritance Tax today.  Make sure you find an Inheritance Tax adviser who specialises in the subject and who can give you specific advice for your own unique circumstances .

For more help, please call me us on 01273 921990 or e-mail John Kelly.

What next?

For more help, please call me now on 01273 921990 or e-mail me John Kelly.

Want to know more about inheritance tax planning? Order a free copy of our IHT Book.

If you'd like to explore your financial options, read more about retirement planning.

Find out more about the advantages and disadvantages of equity release and contact our independent financial advisors for more information.

Ask A Question!

We are always happy to help individuals solve their own, personal IHT problems. If you would like to ask us a question about your own personal circumstances, we will happily give you an answer on a single, basic issue free of charge on the basis that we accept no liability. Please note that we cannot answer legal questions or questions relating to companies or property transfers.