Property Hawk the landlord's homepage since 2006
Free Tenancy Agreement FREE tenancy agreement
Free Landlord Software FREE landlord software
Home | Property Manager | Free ASTs | Landlord Forms | Mortgages | Insurance | Inventory | Magazine | Landlords Bible | Directory | Forum | Training | News / Blog |

Monday, July 21, 2008

Four Ways you could try to reduce.....

......your Inheritance Tax liability.


What is inheritance tax (IHT)?


Inheritance tax is commonly referred to as both a 'gift tax' and also as a 'death tax.'

If, during your lifetime, you 'gift' part or the whole of your estate, then the inheritor will be liable to pay inheritance tax.

Similarly, if, at the time of your death, you pass on part or the whole of your estate, then again, the inheritor will be liable to pay inheritance tax.

Is there an IHT allowance?

YES - but it is not really that favourable, given the property price increases over the past few years.

For the 2008-2009 tax year, the IHT threshold level is £312,000. Anything above this amount is taxed at 40%, i.e., at the highest rate. This means that if, at the time of death, your whole estate is valued at less than £312,000, then the inheritor will have no tax to pay. But, if it is over this amount, then anything above the £312,000 threshold level will be taxed at 40%.


Now, given the dramatic property price increases over the past few years, this threshold level seems to be VERY LOW. If parents living in London and the South East, in particular, were to pass away today, then it is highly likely that they would trigger an immediate tax liability on their loved ones. This is because a very large number of properties in these areas are already valued at above the threshold level! The average property price in the UK in 2020 is predicted to be in excess of £330,000.

One VERY important point to note!


If YOU die tomorrow and leave the estate to your children, then any IHT liability is due immediately by them

FOUR ways to reduce inheritance tax

Here are four common ways of reducing inheritance tax.

a) Utilising the £312,000 threshold level.

If circumstances are such that your estate is not worth more than the current threshold level, then as mentioned earlier, there is no tax liability for the inheritor. However, as we have seen earlier in this strategy, this scenario is becoming more and more unlikely!

b) Gifting to a spouse.

All gifts between husband and wife are exempt from tax, as long as they both live in the UK. This means that even if a husband has an estate valued at £10 million pounds, then he can gift this to his wife.
It does not matter if it was gifted during his lifetime or at the time of his death; his wife will incur no tax liability.

c) Gifting as soon as possible during your lifetime.
During your lifetime it can be tax-beneficial to gift sooner rather than later, especially if you know who your estate is going to go to.
There are two significant benefits of gifting during your lifetime.

(i) The longer you live, the less tax your inheritors will have to pay.

This is because there is a scaling taper relief that is available, which reduces the amount of tax that is liable.
So, if you transfer a property or gift it away and survive for seven years, then the inheritor will have ZERO IHT liability.
(ii) You can use the IHT allowance again. If, after gifting, you survive for more than seven years, then you can use the IHT allowance AGAIN!

This means that if you gift properties to the value of £156,000 each to your son and daughter and survive for seven years, then you can use the IHT allowance to gift up to £312,000 again!

d) TRUSTS You have already learned that husband and wife incur no IHT liability when gifting to each other. However, if you want to gift to your children, then setting up a trust may be the best option.

Trusts can be used to hold properties as well as other appreciating assets such as stocks and shares. Properties can be placed into trusts in a tax-efficient manner, which can help to significantly reduce and even avoid capital gains or inheritance tax.

There are a number of different types of trusts that can be set up to make tax savings.

Each has its own merits and is suitable for different scenarios.

I strongly recommend that if you are considering transferring to your children or other members of your family, then you take tax advice from a TRUST expert.

DON'T forget YOUR capital gains liability!

Remember, if you decide to gift/transfer a property, then YOU are still liable to pay capital gains tax on any profit that YOU have made. If you transfer/gift a property, it does not eliminate YOUR OWN tax liability.


DON'T forget this important point! Timing of the transfer is CRUCIAL.


No comments: