When looking for ways to save money, it is often necessary to focus on more than yourself. Inheritance tax is imposed on an estate upon death and may also be payable on a trust or gift made while living. The estate includes all items owned individually and a portion of items owned jointly.
The current inheritance tax thresholds of £325,000 for an individual and £650,000 per married couple are set to remain in place until 2015. Reviewing the potential liability and taking steps to reduce or eliminate it represents future savings for loved ones.
Investments, property, cars, furniture, jewelry, art, insurance, and pension plan payments are eligible for inclusion in an estate. Gifts made within the past seven years and those from which you still benefit may also count toward an estate. Assets held in trust that provide personal benefit are also eligible. Even an employee death benefit can be included unless it is part of a trust. These inclusions cause the value of many estates to exceed the relevant inheritance tax threshold.
The value of the estate in excess of the threshold is taxed at a rate of 40 percent. This means that the inheritance tax bill for an estate valued at £400,000 (just £75,000 over the threshold) will be £30,000. For an estate valued at £600,000, the inheritance tax bill creeps into six figures with a total bill of £110,000. This figure is astounding considering that many people do not make this amount of money in one or two years.
The good news is that assets passed between civil partners or spouses are exempt from inheritance tax regardless of worth and how soon death occurs after they are earned or acquired. Money given away outright is also not subject to inheritance tax as long as the gifter survives for seven years following issuance. Gift amounts are included in the estates of those who die within the seven-year period. However, taper relief may reduce the amount of inheritance tax.
Planning For Inheritance Tax
With the prospect of 40 percent tax on their estate, many people wish to reduce the future financial burden on their loved ones. Fortunately, this is possible and is quite easy to do. By making gifts while they are young and healthy, people reduce the sizes of their estates. Provided that they survive for seven years after making the gifts, these individuals prevent inheritance tax from being charged on these amounts.
A well-worded will or carefully structured trust can also reduce the amount of inheritance tax. With a trust, an individual may even be able to eliminate the inheritance tax liability for beneficiaries. Exemptions such as moving assets between civil partners or spouses now do not establish a tax liability and could reduce the estate value. Individuals who leave at least ten percent of their estate to charity will be rewarded with a reduced inheritance tax rate of 36 percent.
Life assurance is another consideration when planning for an inheritance tax bill. Though it will not reduce the amount of tax, proceeds from this coverage can help pay the bill. For beneficiaries relying on inheritance to survive, life assurance benefits can represent huge financial relief. They will not be forced to dip into their inheritance to pay the tax bill.
Inheritance tax is a complex topic so advice from a financial adviser is recommended. Though a professional may charge for consultations, the amount of money saved by implementing the advice may far outweigh the cost. With the financial well-being of future generations on the line, it is important to structure the estate to reduce or eliminate inheritance tax.
An introduction to inheritance tax video (for people in the UK)