IHT - a general guide for the family pot (Tips on reducing Inheritance Tax)

Member Name: fionajm

Product:	Tips on reducing Inheritance Tax
Date:	29/12/01 (1306 review reads)
Rating:

Advantages: Keeps the government coffers going

Disadvantages: You work or your life and then it is snatched away after being taxed already a million times through VAT, CT, IT...

IHT is a minefield sometimes so I thought it would help if I put down in black and white what you can and what you can't do... other than live for ever!

Hopefully this op doesn't look too list like, but it is the easiest way I can convey the complicated IHT rules. Hope you agree! I've had to struggle through this recently with my parents and it is hard enough as it is when someone passes away never mind having to wade through solicitors advice too.

IHT is charged on:

the transfer of assets on death;
lifetime gifts which do not qualify for a special exemption - gifts to discretionary trusts (chargeable lifetime transfers); and
lifetime gifts which become chargeable as a result of being made within 7 years of the donor?s death.

There are a number of exemptions and reliefs that affect this basic structure.

The 7 year cumulation period

IHT operates on a cumulative and chronological basis: each later chargeable transfer is added to all chargeable transfers in the previous years. Once 7 years has elapsed after the date of transfer, the original value of earlier transfers is taken out of the cumulative total.

Rates of IHT

There are two rates of IHT, a nil band rate where zero IHT applies- this is to £242,000 and the 40% band which is any amount thereafter if no reliefs apply.

On certain gifts IHT is payable at one half of the death rates given. These are chargeable lifetime transfers. If the transferor dies within 7 years of making the transfer, further IHT may be payable.
If potentially exempt transfers (PETS) have been made, they only become chargeable to IHT if the death occurs within the next 7 years.

A form of taper relief covers more than 3 but less than 7 years before the transferor?s death of 20% to 80% relief.

PETS

PETS are exempt if the transferor survives 7 years after the transfer date. No tax is payable at the tran
sfer date- only if the early death occurs as above
PETS are examined specifically as loss to transferor rather than value to the transferee.

PETS are outright gifts and can be as much as you like- but must not be a gift with reservation i.e. you can?t give away your house and live in it for free you would have to pay a market rent for it to your children, or all your money as you would need something to live on!


Not chargeable to IHT

Payments for the maintenance of spouses, children and dependent relatives are not chargeable

Exempt transfers

annual exemption: The first £3,000 each plus any unused balance from the previous year
small gifts exemption £250 outright to any one transferee
gifts in consideration of marriage £5,000 parent, £2,500 grandchild, £1,000 in any other case.. consideration of marriage, not merely on occasion of it.

Discretionary trusts

Gifts into discretionary trusts are chargeable lifetime transfers. IHT would be payable during the transferor?s lifetime. Tapering relief would occur or the full exemption effectively given if the transferor lives for 3 to 7 years. That could give a considerable saving (the credit is made for lifetime tax paid). This would need careful planning and would mean upfront payments of tax. However could reduce the overall payment over the lifetime of those involved. Don?t know much about this point so I would check this out. If you like the idea of trusts there are many models out there.

Capital appreciation

If an asset has potential for capital appreciation, the value of it is at transfer- not at death. Therefore buying appreciative assets such as antiques is prudent and gifting them (or hiding them!)- or transferring shares at a stock market drop.

Transfers to spouse

Each spouse is considered a separate person for IHT purposes and it would be wise to transfer property from one to the other so both
can make full use of their annual exemptions and nil band.

Arrange your estate equally to ensure the nil band is used by both (242k)

An amount of the nil band should be passed immediately down to the future generations on death rather than the surviving spouse to prevent a double tax hit.

Conclusion

You can gift £3,000 this year or £6,000 including last year if not already done in1999/2000 as this is an unused balance from the previous year
You can gift £5,000 as a wedding gift, you will have to caveat the gift as a proviso of marriage for this year. Something if you have read my other ops that we have done because we are getting married.

You can gift a further £250 to anyone else you wanted to. Unfortunately unused balances cannot be passed over.
You could both also gift to charity and political parties (not above because I have stuck to family issues).

You should ensure that yourself and your partner have an equal part in the estate so IHT is not payable twice (although wills can be altered this can be a lengthy process).

You should consider making potentially exempt transfers of lump sums etc which will have taper relief applied over the 7 years and then be free of IHT thereafter.
You should not give away too much in case your offspring die and it becomes liable to IHT there too.

Consider setting up a trust
Consider setting up a trust for grandchildren- then over a long period of time IHT will miss a generation. Not sure whether you can do this for unborn children, however I seem to remember a 25 year rule covering altering wills to cover this sort of thing (another thing to check!).

Further info can be find of the legal kind on http://www.inlandrevenue.gov.uk/

As a caveat... always ask your accountant!!

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