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Inheritance Tax (‘IHT’) is generally considered a death tax, but managing your liability starts within your lifetime and is about more than just preparing a will.
Estate planning is about making decisions and creating a plan as to how to pass your assets to the intended beneficiaries.
In most cases this will also involve doing so in the most tax efficient manner.
With property prices increasing and allowances frozen, it is no longer a tax that is reserved for the wealthy. There are plenty of things you can do during your lifetime to ensure that you pass on the maximum wealth to your intended beneficiaries through inheritance tax planning.
IHT is paid on assets bequeathed when a person dies, it may also arise on certain lifetime gifts. The current rate of IHT is 40% which is payable where the total value if the gift exceeds the nil rate band (currently £325,000). This rate is reduced to 36% by leaving at least 10% of your estate to charity.
Those who are married or in a civil partnership will potentially have a combined nil rate band of £650,000 and the transfer of your main residence to your direct descendants attracts an additional tax-free allowance. Reliefs are available in respect of qualifying business and/or agricultural assets providing certain conditions are met.
IHT on chargeable lifetime gifts (i.e. to a trust) is either paid by the recipient or the taxpayer (the donor). IHT due on death is reported and paid by the executors of the Estate and oftentimes reduces the final value of what’s left for beneficiaries. This is particularly important to consider when gifts made during your lifetime fall to be taxed as less than seven years has elapsed between the date of the gift and the event of your death.
The relationship of the beneficiary to the donor, the type of assets held, and domicile status all play a part in the amount of IHT due on gifts made from your estate.
Effective estate planning can help protect your assets from unexpected events such as divorce, separation and bankruptcy thus ensuring your wealth passes to the those you choose. It can also help to reduce tax liabilities for the next generation and beyond and provide assurance to you and your beneficiaries that things have been taken care off and they won’t have to sell treasured heirlooms to settle liabilities.
The amount of Inheritance Tax which is paid depends on what assets there are at the date of death and also on what gifts have been made during lifetime. There are a number of rules and figures which determine whether your estate will be liable for Inheritance Tax. Please contact us for more information about this.
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