TAKING measures to mitigate tax on one’s demise is often regarded as a taboo subject, but careful and early lifetime planning can significantly reduce the loss of wealth from a deceased’s estate.
An individual’s estate is normally comprised of assets such as the value of their home, savings and investments assets like quoted shares as well as personal possession such as jewellery.
Amounts owed by an individual at the date of their death are taken into account to determine the value of their net estate.
Where an individual’s net estate exceeds the nil rate band of £325,000 (£650,000 for married couples) on death, Inheritance Tax (IHT) of 40% is levied on that excess. Even with the continued lack of growth in the economy the incidence of IHT is no longer the domain of the very wealthy.
For those with modest assets but not significant pension income there is often not much that can be done to mitigate the IHT cost for the next generation.
If you need the assets for security of income in your retirement you cannot also give them away to mitigate IHT.
There are some insurance company products available to partly achieve this but should only be used with great care and with complete understanding.
Those who are less reliant on capital – and who have already made adequate financial provision for their spouse – could make sizeable gifts during their lifetime to children or grandchildren to save tax in the future.
Gifts of up to £3,000 per individual can be made annually and are completely ignored for IHT purposes.
If the £3,000 annual exemption has not been used in the year it can be carried forward to be used in the following year, potentially giving scope for up to £12,000 to be gifted, for married couples.
Where individuals have surplus income, after taking account of all domestic expenditure, they could make annual gifts out of this surplus which could be exempt from IHT, as long as the gifts do not affect your current lifestyle.
This may be of benefit to say grandparents wishing to help their grandchildren who are faced with increasing educational costs whilst at the same time helping to mitigate their own IHT liability.
This type of gift must be intended to be made on a regular basis and a good way of demonstrating this would be to set up a regular standing order payment from you to the recipient.
You do not need to commit yourself for a fixed period of time but your intention must be to make more than one gift.
Gifts made by parents to their child on the occasion of marriage are also exempt from IHT up to £5,000 per parent (£2,500 for gifts made by grandparents).
Lifetime gifts in excess of these exemptions will be free of tax provided the donor survives 7 years thereafter.
For those contemplating making sizeable gifts, the use of ‘nil rate discretionary trusts’ during lifetime or through via their wills can still play an important role where taxation issues are not the only ones – for instance, where individuals are concerned the ultimate destination of assets and protecting such assets from young or inexperienced beneficiaries.