Major Milestone as Anne clocks up over 1300 weeks service in 25 years working for Fishers! Legal Secretary Anne Chapman has recently been celebrating her 25th Anniversary working for Fishers Solicitors. Anne had worked for several law firms before...
Inheritance Tax Planning - legitimate or immoral?
The number of celebrities being caught up in ‘tax avoidance’ schemes has been widely publicised. However, recent statistics issued by the Institute of Fiscal Studies suggest that Inheritance Tax (IHT) is no longer just a problem for the rich and famous, many of us are getting caught in the net.
The Inheritance tax threshold has been frozen at £325,000 for the next 4 years and yet house prices continue to rise. It should therefore not come as a surprise that the number of estates that are expected to have an inheritance tax liability is set to double in the next five years.
Inheritance Tax levied at 40%
Inheritance tax is currently charged at a rate of 40% on the value of your assets that exceed the threshold of £325,000.
With the threat of ‘accelerated payment’ laws which will enable HMRC to demand that inheritance tax is paid during your lifetime if you are suspected of entering into a tax avoidance scheme, what are we legitimately allowed to do?
There are many reliefs and exemptions that are sanctioned by law and which may be utilised by those facing an inheritance tax bill. These include:
• Gifts to a spouse or civil partner
Any gift made between spouses or civil partners during your lifetime or on death is free of IHT. Since October 2007, you can also transfer any unused inheritance tax threshold from a late spouse or civil partner to the second spouse or civil partner to be used on their death. This can increase the inheritance tax threshold of the second partner from £325,000 to £650,000 depending on certain circumstances.
• Gifts to charities
Gifts made to UK charities are exempt from IHT and gifts to charities on death may even reduce the IHT charge levied from 40% to 36%.
• Annual exemption
Lifetime gifts are exempt up to £3,000 a year.
• Normal expenditure out of income
Lifetime gifts are exempt if they form part of your normal expenditure out of income provided that you are left with sufficient income to maintain your usual standard of living. A regular pattern of giving is required, for example meeting annual school fees for a grandchild.
• Small gifts
Any number of gifts up to £250 during a tax year are exempt as long as the gift to any particular individual for that tax year does not exceed £250 in total.
• Wedding or civil partnership gifts
Lifetime gifts on marriage or civil partnership are exempt. The amount that you can give depends on your relationship to the couple.
• Potentially exempt transfers
If there are no other exemptions available, an outright gift to an individual called a “potentially exempt transfer” may eventually fall out of charge. They are so called because if you survive for seven years from the date of the gift, the gift becomes fully exempt.
Aside from the reliefs and exemptions already mentioned, an up to date Will can also be an effective inheritance tax planning tool. The use of certain types of trust in a Will may be useful especially where the value of certain assets is expected to grow faster than increases in the inheritance tax threshold.
With the average house price in the UK at a record high of £250,000 you may easily find yourself straying into the realms of paying inheritance tax. The inheritance tax threshold may increase to £1 million as promised by David Cameron but until that day, take steps to review your situation now and seek the appropriate advice.