Tuesday, 20 July 2010

Top 10 tips for avoiding Inheritance Tax

By Fiona Dodd, Mayo Wynne Baxter

Inheritance Tax is money that is paid out of your estate to the Inland Revenue on your death. The current rate is 40% of everything over £325,000 for an individual or £650,000 for married or civil partners.

You cannot avoid Inheritance Tax if your assets exceed these thresholds but there are procedures you can put in place now which can reduce the amount that goes to the taxman.

If you would rather see your friends, family or favourite charities benefit, then follow my top ten tips for reducing Inheritance Tax (IHT).

1.Know exactly what you have got

List your assets. How much are they worth? Do you need them all? Are any in joint names? Can you transfer any to your heirs now?

2. Get married

If you are a widow or widower, you can add your deceased partner’s allowance to yours, giving you an allowance of £650,000.

3. Spend it!

Ever thought of SKIing - Spending the Kids Inheritance! However, if winter sports aren’t your thing, then round the world cruises, sports cars (assuming they depreciate in value), or even second marriages can significantly reduce your capital and therefore the amount of IHT that would need to be paid.

4. Give it away

A simple solution is to give it away now, but unless you live for seven years after making the gift, your beneficiaries will still be liable for any IHT. However, there are some exemptions:

• Regular gifts from your income (rather than your capital) are not liable for IHT if they do not affect your standard of living.
• You can gift a total of £3000 a year from your capital without incurring IHT
• Contributions to family weddings (parents can give up to £5000, grandparents up to £2500 and other family members £1000)
• Donations to charity – any amount at any anytime, providing the charity is registered.

5.Check your investments

There are a number of IHT efficient investments such as Gift & Loan Trusts, Discounted Share Trusts and shares listed on the Alternative Investment Market (AIM) http://tinyurl.com/lxnpjh. An Independent Financial adviser will be able to help you.

6. Use your business exemptions

Business property is entirely exempt from IHT as is agricultural land, providing it is a proper working farm. Land used for business purposes gets 50% tax relief.

7. Life insurance and pensions

This is a very good time to look at your policies, as you may have collected a few throughout your career.

• Who receives the benefits?
• Can you nominate a beneficiary?
• Are the policies sufficient to cover your dependants’ needs after your death?

8. Make a Will

If you don’t have a will, you will die intestate. This means that your assets will be distributed according to the law rather than according to your wishes. An up-to-date and professionally drafted will:

• Clearly sets out your intentions
• Ensures all your tax allowances are used
• Avoids arguments and bad feeling among your beneficiaries

9. Take professional advice

Don’t be tempted to try and write your own will. It is a complex process and it is very easy to make mistakes which can turn into a real headache for your beneficiaries.

It’s also wise to take advice from an Independent Financial Adviser, particularly if you have complex, high value or multiple assets.

Professional advisers have specialist, up-to-date knowledge and will ensure that your estate is passed on according to your wishes. They will probably save you money through tax and other savings in the long run.

They will also have professional indemnity insurance so if you are given bad advice, there will be recompense for you and your dependants. Whereas if you make the mistake, there is no recourse.

10. What not to do

• Bury your head in the sand - death and taxes are both inevitable
• Leave it too late. Remember, anything you give away seven years before your death is exempt from tax
• Write your own will
• Believe every sales pitch. Do your research and take advice before committing to an investment plan
• Worry. The sooner you start organising your assets, the sooner you can relax

Fiona Dodd is an Associate Solicitor within the Probate, Trusts and Wills Department with Mayo Wynne Baxter LLP. For further information please contact 01273 775533 or email fdodd@mayowynnebaxter.co.uk

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