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Thursday, 24 April 2014

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Careful planning keeps the taxman at arm’s length

There is often a real fear with many clients that when they start to discuss inheritance tax planning it will hasten their own demise.

I’m certainly not aware that this is the case but I am aware that there are many families that have not had open and frank discussions about the impact of the tax on their family’s wealth. However, as with all planning the sooner these conversations are had the better.

As many will already know, every individual can own £325,000 of assets and not suffer any inheritance tax. If you are married then you can hold £650,000 of assets before your estate suffers tax.

This amount can be increased further where the husband or wife, or both, have been married previously and that spouse has died, which means that very careful planning is required to protect the tax free allowances available.

While the above limits may seem very large, it is incredible how many people find that their own estates exceed this amount when they sit down and add up all the assets they own.

The family home will probably be the biggest, but to this you add all your belongings, cars, life insurance proceeds (if not written in trust), investments and bank accounts (including ISAs) both in the UK and offshore. If you own a second property this needs to be added to your assets to get the total of your estate.

There are things that can be done to reduce your liability but generally you need to give away an asset so you no longer benefit from it.

However, if you do benefit from the asset – and this particularly catches those who give away their home and continue to live there – the asset is simply added back into your estate, so the planning has achieved nothing.

For this reason alone giving away your home to try to avoid inheritance tax is almost always the wrong thing to do. Often it makes matters worse.

One option is for you to examine your assets and look at those that currently do not generate you an income and decide if they could be gifted now, while their value is perhaps lower.

However, when considering giving away assets, firstly make sure you do not need the asset or its capital value in the future because, for the gift to be effective for tax purposes, you need to give it away and not benefit from it. Secondly, watch out for other taxes such as capital gains tax on any gifts, as this can be an unwanted surprise.

One relief that people often under use is the ability to gift away the excess income they receive each year.

This means that if your income is £25,000 a year and you only spend £15,000, the balance of £10,000 can be given away with no inheritance tax consequences.

There are conditions on this relief but as long as you establish a patten of giving away your income, and your lifestyle is not compromised, then the gifts you make out of income do not suffer from the normal seven-year clock.

If your estate is affected by inheritance tax and you want your family to be the beneficiaries rather than the taxman, seek out professional advice because the consequences of not doing so can be costly.

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