How to reduce inheritance tax

How to reduce inheritance tax

How to reduce inheritance tax

IHT is a tax on the value of the estate at death but also on chargeable transfers made with various reliefs. When discussing matters, care is being required for both lifetime and after death. Consider using these six tips to learn out “how to avoid inheritance tax”.

 

Be clear on the assets in an estate – some are exempted from inheritance tax

 

For example, Mr. A has net assets of £1m. He dies on 30 June 2019. If all these assets are subject to inheritance tax then the inheritance tax will be as follows:

  • Value of estate at the date of death of Mr. A 1,000,000
  • Less exempt amount 325,000
  • Value of estate subject to IHT 675,000
  • Tax due at 40% 270,000

If included in Mr. A ‘s estate: There are certain excluded properties. Which should not measure in the estate ‘s value when measuring IHT.

For example, Mr. A has exempt assets of £200,000 and other assets of £800,000 when he dies on 30 June 2019) then:

  • Value of estate at the date of death of Mr. A 1,000,000
  • Less exempt assets 200,000
  • 800,000
  • Less exempt amount 325,000
  • Value of estate subject to IHT 475,000
  • Tax due at 40% 190,000

Hold these exempt assets for inheritance tax payable. It reduces by £80,000. For assets to qualify for this exemption these conditions need to be satisfied:

  • The exemption only applies for certain types of assets
  • Assets need to held for the least period before the date of death.

Some of these exempt assets are as follows:

  • Shares quoted on the Alternative Investment Market (min period: two years)
  • Shares in other unquoted trading companies (min period: two years)
  • Agricultural land farmed by the owner (min period: two years)
  • Agricultural land if let under a farm business tenancy (min period: seven years).

 

Consider options that are available for gifts, for example, equity release

 

The home-owner may take out an available equity release loan and make a cash gift. Which would be treated as an exempt transfer?

The loan does not have to be with an external commercial organization. If there is a wealthy family member. It may be that the loan could be arranged with that person. Provided the borrower has not before made many gifts to him or her.

The exempt transfer would become exempt if the transferor survives seven years. The loan would be a liability that reduces the value of the estate of the transferor.

 

Make pension contributions to a qualifying non-UK pension scheme

 

A qualifying non-UK pension scheme (QNUPS) is an overseas pension scheme. The main features of a QNUPS are as follows:

  • Contributions into the scheme do not attract tax relief
  • There is no greatest level of contributions, although HMRC may see large contributions. Like tax avoidance, if they affected the individual’s standard of living
  • The member can make withdrawals during his/her lifetime. (Although these withdrawals would be taxable in the UK as normal pension income). The remaining balance passed to their chosen heirs on the member’s death
  • Income and gains made by the QNUPS would be subject to tax in the local country where the QNUPS located in
  • The funds in a QNUPS will not be subject to UK inheritance tax. Unless there is evidence of deliberate tax avoidance
  • QNUPS needs to meet the conditions in Statutory Instrument 2010/0051. (Inheritance Tax (Qualifying Non-UK Pension Schemes) Regulations 2010).

 

Consider property transfer options

 

If children live with their parents – and where this is likely to continue for some time. The parents would gift a share of the property to the children. For capital gains, this would be a gift to connected parties. So, would deem to occur at market value for capital gains tax purposes. It may be exempt if covered by the private house relief of the parents. The children’s acquisition cost would be deemed as the market value at the date of transfer. For inheritance tax purposes this would be an exempt transfer made by the parents.

It would give rise to the potential reservation of benefits provisions. which would occur if the parents receive any benefits, other than a negligible one. which was provided by or at the expense of the children connected with the gift. The risk of reservation of benefits provisions will be minimized.

If the children do not bear more than a fair share of the running costs of the home. For example, parents could continue to meet all the running costs. The risks can also be reduced by not giving too large a share of the home to the children. To this end, equal ownership by all involved may be advisable.

 

Payment by installments

 

Payment of inheritance tax by installment is necessary. If the sale of land and buildings requires an IHT liability. This applies to any kind of land and property wherever situated. An election in writing to the board of HMRC may be made to pay the tax due by ten equal yearly installments.

Where the first installment is payable on the due date on which the whole tax would otherwise be due. Where the transfer is on death. The first installment is due six months after the end of the month in which death occurs. Even if the personal representatives must otherwise pay tax before that date.

 

Substitution for the value of the death

 

Where land or buildings in a deceased person’s estate is sold out within three years. At times in four years, after death a claim (on Form 38). That’s when the sale value substitutes the value of death. Various conditions need this relief to be available as explained. ( Inheritance Tax Act 1984 sections 190 to 198). The claim should be made not more than four years from the date of death.

 

Transfer to nominated beneficiaries

 

Funds held in a Self-Investment Pension Plan (SIPP). SIPP held on the death of the member may transfer to the ‘nominated beneficiaries’. The member should complete an ‘expression of wish’ form. Each pension plan to the state to whom they wish the benefit to pay.

The trustees of the pension fund usually obey the guidelines. Unless extraordinary circumstances occur. Expression of wish form guides. The scheme administrators/trustees to exercise at their discretion. They stated wishes in the way that the policyholder would have wished. They refer to the most recent form when making a decision.

If a policyholder dies before the age of 75, either before or after they start to withdraw benefits. The funds held in the SIPP can be transferred to any nominated beneficiary tax-free. ( It was only possible until April 2015, when the member began withdrawal).

If death occurs after the age of 75, either before or after they start to withdraw benefits. The beneficiaries will be taxed at their marginal rate of tax if funds are taken as a lump sum or income. (although it can be transferred to their own SIPP instead).

Irrespective of whether the policyholder dies before or after the age of 75. The funds in the pension plan will not form part of the estate for inheritance tax purposes. So, there should be no inheritance tax to pay on the funds in the SIPP.

Disclaimer: –

Call Now ButtonCall us now