IHT planning and avoidance basics
For example:-
| Value of estate | 350,000 |
| Nil rate band | 255,000 |
| Excess | 95,000 |
| IHT Bill | 38,000 |
It is important to note that your beneficiaries will be requested to settle the IHT in advance BEFORE your estate can be distributed. If the beneficiaries are infants this can cause a major problem. Proper inheritance tax planning can help you avoid this tax.
Transfers of property and gifts between husband and wife, no matter how large in value are exempt of IHT. This is known as the inter-spouse exception. Smaller gifts not exceeding £3,000 in any one tax year and gifts to sons and daughters of £5,000 in the year of their marriage are also exempt as is any number of gifts of less than £250.
Transfers of property and gifts which exceed the above amounts are headed as “lifetime gifts” and are only considered exempt from IHT providing the donor survives a minimum of 7 years from the gift, otherwise these gifts are added back into the estate and taxed accordingly.
In the case of married couples each partner’s estate is assessed separately at the time of death for IHT purposes and each partner qualifies for the nil rate band providing together an aggregate exemption of £510,000.
Three practical methods of avoiding IHT:
- Take advantage of the nil rate band which is currently £255,000 per person.
- Outright gifts (usually into trusts).
- A joint life whole of life insurance policy written in trust for the benefit of the heirs of the estate.
In practice and in our experience, each client’s inheritance tax planning requirements can vary considerably and often require a combination of some or all of the above methods and the use of other tax avoidance vehicles.
Inheritance tax planning is a specialist field and we strongly advise that before entering into any schemes you should seek our advice and expertise.