Inheritance tax: avoiding the potential pitfalls
A recent study found that just 45 per cent of people who are gifting assets or large sums of money through inheritance understand inheritance tax (IHT) rules.
The research was conducted by HM Revenue & Customs (HMRC) as they attempt to ascertain the public’s understanding of IHT and information on their gifting behaviour.
We have put together our top tips for avoiding the potential pitfalls of inheritance tax to ensure you make the most of your gift to your beneficiaries.
Prepare a Will but do not use a DIY pack or an online Will scheme as these often carry technical or legal errors which store up difficulty and expense for the future. So, consult a solicitor who is a member of STEP (Society of Trust and Estate Practitioners) or of SFE (Solicitors for the Elderly). By creating a valid Will you ensure that your wishes are carried out and you will receive the best tax and general advice. This will be particularly important in difficult family situations
Be aware of the tax breaks
There are different tax-free allowances for making lifetime gifts, these include:-
- The annual exemption of £3,000. In addition to this, any unused allowance from the previous tax year can be used, meaning that there is a possible £6,000 that can be gifted in a year, providing the exemption was not used at all the previous year.
- Regular gifts from income can be made that will be exempt from IHT in the future, but they must be made from taxed income, made habitually and leave you with enough income to maintain your standard of living.
- There are exemptions such as marriage gifts (up to £5,000 for children, £2,500 for grandchildren and £1,000 for anyone else), small gifts of up to £250 per year to an unlimited number of individuals providing they haven’t received another gift that uses an exemption.
- Donations to charities and political parties.
- Gifts between spouses and civil partners (and there is no such thing as a common-law spouse).
- Any gift to an individual for any amount provided you survive the gift by seven years.
Know the rules
There is usually no IHT to pay if either the value of your estate, excluding the value of gifts to a spouse, civil partner or charity, is below the £325,000 threshold.
If you give your home to your children (including adopted, foster and stepchildren) or grandchildren, the threshold can increase to £475,000 (£500,000 from 2020/21)
If you are married or in a civil partnership and you leave your estates to each other, then the estate of the survivor can potentially have a threshold before tax is paid of £650,000 or up to £950,000.(£1m from 2020/21)
There are special tax reliefs applicable to agricultural and business property
The standard rate of IHT is 40 per cent, which is only charged on the part of your estate that is above the threshold after applying the exemptions and reliefs which are available
Inheritance Tax is complicated and you should always consult a STEP or SFE solicitor.
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