It is quite astounding the number of people who leave the question of Inheritance Tax until it is almost too late!
Where the amount of inheritance is not too large, say around £200,000 which also includes the value of the deceased’s home, then not too many problems will arise. However when this value increases, particularly when the property is valued in excess of £300,000 then inheritance tax can become a severe problem for the dependents.
There are ways in avoiding inheritance tax but remember this should never be confused with the evasion of inheritance or any other tax: this is strictly illegal.
Many people make the horrendous mistake of thinking that they can “give” their main asset, namely their home, to members of the family and this will absolve them of any liabilities for Inheritance Tax. Unfortunately nothing could be further from the truth unless they apply strictly to the rules that relate to Inheritance Tax.
There are two main points that you need to consider; the time that you make the gift and your living arrangements after you make the gift. Let us then look at these on an individual basis.
As the law currently stands, you are permitted to make a gift, no matter what it may be, to your spouse or civil partner and the relevant amount will not be included in your estate and so will not be subject to inheritance tax. This assumes that your spouse or civil partner permanently resides in the UK and if not, then separate rules will be applicable.
However the same rules do not apply if you decide to make a gift of your main residence to a member of the family and in this instance the crucial number “7” is pertinent. For a gift of any type to be excluded from inheritance tax, the gift must be made at least 7 years prior to your death. Under this section we will look only at the exemption as it applies to the main dwelling and will deal with other gifts later in this report.
You are quite entitled to give your home to a member of your family, other than your spouse/partner but there can be a number of risks involved in doing this.
Before making the gift though, there are a number of other points that you need to seriously consider and the most important is this: it is an irrevocable gift and once you have made it and the papers have been signed, you cannot change your mind and take it back! Let us look at a few more scenarios with regards to gifting your home, particularly to a child or another member of your family. Remember that relationships within families change all the time and you can be sure that yours is no different.
All I can say is this – think long and hard before gifting the main house in which you live because it can bring many more implications than just being able to avoid inheritance tax.
There are a number of other ways in which you can avoid paying inheritance tax and funnily enough, in order to take advantage of several of these, you can be generous at the same time. But from the outset, let me stress two basic points:
If your income is deemed to be “substantial”, making a regular gift to one or more persons can greatly contribute to the reduction of your inheritance tax bill. However for them not to be considered as part of inheritance tax assets they must:
The rules in relation to inheritance tax allow you to give anyone an amount of up to £3,000 per person per year. This means that not only are you able to make an annual gift to each of your children but you can also make similar annual gifts up to £3,000 to other relatives and friends. These gifts are not subject to the “7-year” rule and quite frankly, whilst not a large amount on an individual basis, if started early enough, can build up to a substantial amount over a period of time.
When your children get married the inevitable question is asked “what would you and your fiancé like as a wedding present?” Well you can still offer a more tangible gift but each parent is permitted to give each child an amount of £5,000 as a wedding present and regardless of when it is given, even well within the 7-year period, it does not fall for consideration under inheritance tax. Effectively you are therefore granting two gifts – an immediate monetary one of £5,000 and a future reduction in inheritance tax!
Obviously this would not be applicable to everyone but a little known fact and exclusion that is applicable to inheritance tax, relates to injuries suffered during military service. Any such injury that was proven to be a contributory factor towards that person’s ultimate death, no matter how far after the injury the death occurred, then that person’s estate may very well be declared free of inheritance tax.
A certain member of this country’s nobility and with a very large estate, died quite a few years after he was injured during the Second World War. It was subsequently found that those injuries greatly contributed to his death. No inheritance tax was paid on the large estate. This exemption from the tax is now all the more relevant following injuries caused as a result of our involvement in the Iraq and Afghanistan wars.
This may seem a somewhat drastic step, but if you hold a considerable amount of your assets overseas and outside the UK, such as a second home and other property, then it is not such an unusual one. The ultimate criterion though is the difference between where you are deemed to be resident and where you are accepted as being domiciled.
The definition as to which country you are deemed to be domiciled is that country where it is your intention to be buried. You may permanently reside in say Spain but in the event of your death, and it is your intention to be buried in the UK, you are then deemed to be domiciled in the UK. If you are UK domiciled then ALL your assets worldwide will be subject to inheritance tax on the event of your death. However if you are accepted as being domiciled in another country, then only your assets in the UK will be subject to the tax. The question of the actual country you are domiciled in will become both obvious and so resolved at the time of your death!
Before I complete a full summary of the various ways to avoid inheritance tax, there is one point upon which I would like to enlarge. Many people confuse the obligation to contribute to or pay in full nursing home fees for elderly person, and that of inheritance tax. The two are completely separate. If the total of your assets currently exceeds £23,000 and since contribution by the state is means tested, then you are responsible for the full costs of your Nursing Home fees. Even though it might fall outside the 7-year rule attached to inheritance tax, if your Local Authority feels that you have gifted your home, your main asset, purely to try and avoid eventual payment of fees, then be prepared for a long battle – Local Authorities do not take kindly to “avoidance” of this type!
This article is intended to be an overview of the various options that are available to avoid inheritance tax for the average person. I would stress that it is essential you take full legal advice before making a final decision as to which method(s) you wish to adopt because laws do change all the time, as do interpretations of the law.
The UK economy is still tight and the signs are that it will continue to be so for a further number of years. With this in mind, it is highly unlikely that any government is going to minimise its opportunities to impose taxes upon the population, particularly those who are deemed to be more “well off!” Property prices seem to be increasing all the time and unless the maximum amount of £325,000 is raised substantially before inheritance tax is imposed, then more people than ever before are going to find that their only main asset, namely their home, has increased in value to such a level that any residual value may well be eaten up by inheritance tax. It will become more and more difficult for parents to pass an inheritance to their children but instead donate it to the tax man!
I can only suggest that you review this report at your earliest opportunity and then take what steps your feel able, in order to avoid paying more than your fair share of inheritance tax.