Ever since 1694 the UK government has considered death as a sensible time to put its hand in our pockets by taxing the estate left behind. By the time the modern system was introduced in 1894, the number of duties and taxes had multiplied to 5: a legacy duty, a succession duty, a probate duty, the accounts duty (an anti-avoidance tax on gifts) and a Temporary Estate duty. From that time the basic principles of a progressive tax triggered by death have been unchanged. Ever since tax advisers have tried to help keep your hard-earned wealth away from the Chancellor.
The most obvious way of avoiding the burden is to emigrate! The next most obvious way is to give away what you can. Children and charities are often mentioned in this context and as long as you stay alive long enough or do it in affordable dollops (out of ordinary income) you can give away everything you own. There are possible drawbacks, ask King Lear. The same effect can, of course, be achieved in terms of tax minimisation by spending the money on fast cars, fast living and slow horses. If you manage to spend it all you do not need a will, but for most people drawing up a will and considering what their spouse and other dependants will inherit is a first and extremely important step. Even if you plan to leave the country or give it all away you should have a will as the grim reaper may call before you have done either.
Trusts can own various assets, and again this approach has been employed for generations. Unfortunately the Chancellor now takes a large share regularly and the net effect of much of the tax planning of recent decades has just been to give him easily taxable assets. But trusts may still have a place in planning, particularly for the care of the disabled.
Business assets include farms and forests and many businesses ( not financial, investment or property) attract relief if in a private company. A portfolio of stocks listed on the Alternative Investment Market (AIM) counts as a business asset with 100% relief.
Consider giving away what you can easily afford at an early stage; only when you have done this should you think about other ways of minimising taxes. The traditional period for gifts to become wholly exempt is 7 years but among other ideas for taxing gifts the possibility of taxing accumulated lifetime gifts in the hands of the recipient has waxed and waned so make any gifts at the earliest possible date. But keep enough for a nursing home in your declining years; you and your heirs will both feel better if you can look after yourself. If you have an income which exceeds your expenditure then giving away the surplus is simple and lies outside the lifetime gifts regime.
Exile may be effective but having seen many of those who move to sunnier climes return because they did not want to die abroad, missed grandchildren or wanted to have the NHS around them be certain that you really want to leave permanently. The outstanding bargains in the tax saving arena are the business property reliefs. Think about how you can maximise the amounts in such ventures.
Finally there are two very important points which are as true now as they were when the first estate duties were designed. The first is that it is a very easy tax to collect because death is difficult for the most avid tax avoider to hide. Secondly, it is the most painless tax to collect because the victims are not in a position to object, or really care too much. So death duties will not go away.
Inheritance Tax is charged on certain lifetime gifts, on the value of an estate at death and on certain transfers into and out of trusts.
No tax is payable until cumulative transfers over a seven year period, whether lifetime or on death, exceed £325,000 for individuals or £650,000 for married couples or civil partners (effective up to and including 2014/2015 tax year). The rate is 40% on death and 20% for chargeable lifetime transfers, payable immediately if the value of such transfers is above the Nil Rate Band. There are certain transfers, which are not chargeable. Broadly these are:
- Transfers to a UK domiciled spouse.
- Transfers up to £55,000 in total to a non-domiciled spouse.
- Transfers to charities.
- Transfers to political parties.
- Lifetime transfers to an individual, or an absolute trust after which the transferor lives for at least seven years and contain no reservation of benefit by the donor, these are known as “Potentially Exempt Transfers”.
- Lifetime transfers out of income which do not reduce capital i.e. one does not have to resort to capital to supplement diminished income.
- The first £3,000 of a lifetime transfer in any tax year is exempt. This exemption can be carried forward for one tax year if unused.
- Lifetime gifts to any person that do not exceed £250 in a tax year.
- Lifetime gifts in consideration of marriage. The exempt amounts are:
£5,000 from parents,
£2,500 from grandparents, and
£1,000 from others.
In addition, Business Property Relief and Agricultural Property Relief may allow business owners and farmers to make IHT-free gifts of some of their business interests.
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