Inheritance Planning.
Inheritance planning is a very important aspect of our daily life. Few of us like to think of time when we die. But when we get to think of it, we always want to make sure that our property will be left to our relatives and loved ones.
Inheritance tax
For citizens of some countries in our world, this may not be a big problem, since there are jurisdictions that do not charge any inheritance taxes. As to citizens of UK, this may turn into headache. Why? Because 40% of what they own above the threshold must be paid to government.
Thresholds
The threshold for the application of inheritance tax has been falling in real terms for a very long time. If you own an average house and are a citizen of the UK, you may be happy to read that the average house price has risen by 138% in the past seven years. However, nil-rate band (amount below the threshold) in the same period rose only by 23.4%. Current threshold is around J285,000, which constitutes an average price of the house. This means that 40% of what you own above the house price (life policies and savings may easily fall into this category) has to be taken away.
Below, table is given to illustrate how ‘costly’ an inheritance tax can be:
| Estate value |
Taxable estate |
Inheritance tax payable at 40% |
| £285,000 or less |
£0 |
£0 |
| £300,000 |
£15,000 |
£6,000 |
| £350,000 |
£65,000 |
£26,000 |
| £400,000 |
£115,000 |
£46,000 |
| £450,000 |
£165,000 |
£66,000 |
| £500,000 |
£215,000 |
£86,000 |
| £600,000 |
£315,000 |
£126,000 |
| £700,000 |
£415,000 |
£166,000 |
| £800,000 |
£515,000 |
£206,000 |
| £900,000 |
£615,000 |
£246,000 |
| £1,000,000 |
£715,000 |
£286,000 |
The saddest part of this statistics is that your heir will have to sell property, before he/she can own it legally due to high tax exposure.
INHERITANCE TAX PLANNING
Fortunately, a range of steps can be taken to reduce this exposure, and cut the amount you are liable to pay. These vary depending upon when you initiate the process, and what sort of approach you wish to adopt.
Traditional ways
Among traditional ways that are advised by the majority of legal advisors the most popular is gifts. Following gifts are exempt from taxes:
a) Gifts made more than seven years before your death.
b) Gifts to your husband or wife.
c) Gifts of up to £3,000 in any one tax year.
d) Wedding gifts are exempt up to the following value: children £5,000; grandchildren £2,500; anyone else £1,000.
e) Gifts that are part of your normal expenditure and made out of your income.
f) Gifts to UK based charities, museums and similar other bodies.
Offshore and inheritance taxes
One of solutions that exists for protection of estate, especially in case of inheritance, is entering into agreement with offshore trust. Pretty basic logic underlying this deed is that taxmen (IRS) can not tax you on something you don’t own.
Another solution would be setting up an offshore company and transferring your estate to that company. In the result, offshore company will become owner of the house and it will be exempt from the taxes.
If you want to get more information on inheritance planning, please do not hesitate to contact us.
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