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HomeInheritance Tax
If you haven't made the right arrangements, your family could end up paying 40% tax if your estate is valued over the new threshold of £300,000. Due to the house prices rocketing since 1998, the Chancellor has now announced that there will be an increase of the Inheritance Tax threshold for married couples and civil partners to £600,000. What has been created is the ability of a transferable allowance between spouses and civil partners. Effectively, it allows for couples to combine their individual allowance. The way it works is that once the first has died (who receives the same allowance as everyone else), if they used none or nil of the band rate then the spouse or partner could then receive 2 nil band rates.
Within this tax threshold also includes your belongings and any bank accounts you have, therefore even if your home does not make it within the band, the rest of your belongings etc could push you over the mark. Therefore, if you have, or expect to have, assets above £300,000 it would make sense to try and do something to take them out of the inheritance tax field of vision.
Make the most by going down the tax free route
• The easiest step to take, if you can afford it, is to make any number of £250 gifts to individuals without being subject to tax
• Alternatively, you can give a £3,000 gift each year without being subject to tax
• Wedding gifts to your children - the marriage gift exemption allows each parent to give gifts up to £5,000 and grandparents to give up to £2,500 to each grandchild. You can also gift up to £1,000 as a wedding gift to anyone else
• Nearly all charity donations are considered exempt and can reduce your inheritance tax liability
• If you give regular gifts, including birthday and Christmas presents, out of your after-tax income that does not impact on your normal standard of living, you may be able to avoid inheritance tax
The most tax-efficient way of passing on your wealth is by making gifts during your lifetime. If you make a gift to another individual, and it is not covered by any available exemption, it is known as a 'potentially exempt transfer' however this transfer will only be free of inheritance tax if you live for at least seven years after making it. If you die within seven years, the original gift will be included in your estate, but any growth in its value will not be included. Taper relief may be available if a 'potentially exempt transfer' becomes chargeable and depending on the size of the gift, only part of the full tax has to be paid on the gift.
Another option that could be made, is to give your home away under the lifetime gift rules. However, you would need to outlive the date of your gift by seven years. There is a downside though, if you choose this option you lose your right to stay in the home. If you did remain the occupant, the Inland Revenue demands that you pay a commercial rent to the new owners, even if these are your own children.
The most famous case is Dame Anita Roddick, founder of the Body Shop. She donated £51 million to charities, which is exempt of tax. However, Dame Anita left just £665,747, the total of which was used by inheritance tax, leaving her net worth at nil!
