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On your death, everything you own that is part of your estate will be liable to 40% inheritance tax (IHT), which could cost your loved ones thousands of pounds. The only way to help reduce paying any IHT unnecessarily is to plan as effectively and as early as possible to ensure your family is protected – and your wishes are respected. Here are a few things to consider for your IHT plan.
Lots of parents and grandparents want to gift money or assets to help their children or grandchildren with expensive life purchases, such as property. However, there are a few things to consider before handing over large sums, so that your family isn’t stung by the taxman later on down the line.
What is a “gift” for IHT purposes?
Any person, called “donors”, can give a gift of money or other assets. A donor can give up to £3,000 in each tax year free from IHT, or, they can either give £250 in small gifts, gifts prior to a marriage or by normal expenditure out of income. These are known as exempt gifts because they do not trigger any IHT charge when the gift is made. This is perhaps the most straightforward method for donors, but again, careful planning is needed if you plan to hand over large sums of money. Even a relatively small amount, say £20,000 towards a deposit on a property, could take around seven years to transfer as a gift without triggering an IHT charge.
If you think seven years is a reasonable amount of time, then you could consider an alternative. If you decide to hand over a £20,000 lump sum to help a member of your family on to the property ladder, the amount will not be taxable, however, if you do not survive seven years afterwards, the gift will be chargeable under your estate and still be liable to pay 40% tax on your gift. It pays to plan with care!
Equally, IHT mitigation can be undertaken by more sophisticated methods, notably, by creation of lifetime trusts. A trust is a method of making a gift from your estate while still maintaining control of the assets gifted and often allowing you to decide who and when beneficiaries will benefit from the asset.
Generally, trusts will have IHT implications. Depending on how much the donor is putting into the trust, there may be an immediate IHT charge as well as charges during the life of the trust depending on its value, albeit made at a relatively low rate.
Again, the donor must survive seven years from making the gift, or the value gifted will be taxed on the donor’s death.
There is a way to make provision for your children without being involved in a long period of running a trust and incurring IHT charges including the costs associated in running a trust. These are called Bare Trusts – look out for more on this coming soon.
Effective estate planning can avoid costly situations to bereaved families, but it can also help mitigate any legal battles. If you would like any advice relating to estate planning, contact Mehboob Dharamsi to see how he can help.