Inheritance Tax Planning
Inheritance Tax (IHT) was paid by 25,000 estates in 2002 and raised a total of £2.4 billion, according to the Inland Revenue.
Many business owners fail to realise that they could be sitting on top of a potentially explosive, ticking tax bomb that is continually being fuelled by rising house prices and the (hopefully) ever increasing value of their business.
That tax bomb is Inheritance Tax (IHT). IHT is a non-discriminating tax that doesnít target only the super-rich.
Letís consider whether you have a potential problem.
The IHT threshold of £275,000 (in 2005/6) means that tax on assets valued up to this amount is payable at a Ďnilí rate. This includes your property as well as your savings, investments, insurance policies not written under trust and business assets (subject to the availability of relief at 50% or 100%).
The value of your estate above this £275,000 threshold could be subject to a tax of 40 per cent, depending on who inherits your estate following your death.
Here are some of the steps you may be able to take to protect your assets from the taxman:
If you are considering making substantial lifetime gifts you should talk to an independent financial adviser, as it might be prudent to make them sooner rather than later. An IFA can also help you look at what options you have for arranging your tax affairs to minimise any IHT liability.
- If you havenít done so already, the first place to start is to write a will. This will ensure that your assets are distributed as you want them to be when you die. Provisions to mitigate IHT can also be included.
- Assets transferred between spouses are exempt from IHT, but other lifetime gifts could also be made in a more tax-efficient way.
- Most lifetime gifts are exempt from IHT if the donor survives for seven years and there is no limit on the size of such transfers, so this is an excellent way of transferring assets that you do not need to keep in your estate. It may be advisable to cover substantial gifts by insurance against death within seven years.
- Trusts enable you to transfer assets out of your estate for IHT purposes, but enable trustees to exercise some degree of control over the capital or income (and you can be a trustee). There may be an IHT charge on creation of the trust if it is a discretionary trust, but this would be at 20%, and then only if the transfer plus previous chargeable transfers made in the preceding seven years exceeds the Ďnilí rate.
- Life assurance policies should be arranged under trust, so that the proceeds do not form part of your estate on death for IHT purposes.
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