Monday, September 10, 2012

What is Inheritance Tax?

www.bethelfinance.com
If you are British tax resident, you might be interested to know more about the inheritance tax and the different ways to reduce it.
Inheritance Tax is usually paid on an estate when somebody dies. It’s also sometimes payable on trusts or gifts made during someone’s lifetime. Nevertheless, most estates don’t have to pay Inheritance Tax because they’re valued at less than the threshold (£325,000 in 2012-13). The tax is payable at 40 % on the amount over this threshold or 36 % if the estate qualifies for a reduced rate as a result of a charitable donation.

Increased threshold for married couples and civil partners

Since October 2007, married couples and registered civil partners can effectively increase the threshold on their estate when the second partner dies – to as much as £650,000 in 2012-13.
Their executors or personal representatives must transfer the first spouse or civil partner’s unused Inheritance Tax threshold or ‘nil rate band’ to the second spouse or civil partner when they die.

How to avoid inheritance tax?
  1. By splitting up your estate in your will, you can insure your loved ones inherit an amount under the threshold.
  2. You can give assets away as gifts tax free of a value of up to £3,000 each year. However, you need to survive the donation by 7 years, or the recipient will be taxed.
  3. You can use a trust
  4. You can Change your domicile :
    Unlike any other tax, UK Inheritance Tax (IHT) follows you around the world, regardless of where you may reside. That’s because it is based on your domicile, not residence. So you need to change your domicile in order to shrug off IHT.
  5. Charities : 
    Leave your assets to charity: no UK IHT. Note that all EU registered charities can qualify ( it used to be limited to UK ones).
  6. Disabled children : 
    Transfers into a trust for disabled children are free from UK IHT. The disability must meet certain conditions. You can be the Trustee so that you are in control of the funds with provisions to appoint others following your death.
  7. QNUPS :
    Transfers into a Qualifying Non-UK Pension Scheme is exempt from UK IHT, and the fund can pass IHT free on your death. Take careful advice on how to set this up. The QNUPS can give the settler an income – no need to be an excluded beneficiary. So you can have access to the funds, yet it is outside of your estate for UK IHT. There is no seven year wait period either. However, there is some anti-avoidance legislation which needs to be reviewed to ensure that you don’t fall foul.
Inheritance Tax is clearly a huge area of money saving; after all you don’t want to be super-savvy all your life just to have most of what you’ve saved go to the taxman.

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