The tax benefits of leaving a legacy

by Dawn Moir, Head of Wills, Trusts & Probate, Goughs Solicitors

Dawn Moir, Head of Wills, Trusts & Probate, Goughs Solicitors
Inheritance Tax is payable on your assets when you die, but brings within its scope certain lifetime gifts, and there are a number of ways it can be reduced or avoided entirely. This article will provide you with some basic information in order to help you decide whether you need further inheritance tax planning advice.
Leaving a gift in your will to charity is one way you can make a difference not only to the cause of your choice, but also to your friends, family, and other beneficiaries. Legacy gifts are exempt from inheritance tax, meaning not only that all of the money you leave will make its way to your intended charity, but the gift may also help bring the value of your estate below  certain taxable thresholds.
Lifetime Gifts
Certain lifetime gifts attract exemptions from inheritance tax:
• Gifts between a husband and wife or civil partners (UK residents) No limit
• Gifts to charity (UK) No limit
• Annual exemption each tax year per donor £3,000
• Small gifts to any number of persons £250
• Wedding gifts by parents £5,000
remote ancestor £2,500
party to marriage £2,500
others £1,000
• Gifts which are normal expenditure out of income No limit
During a person’s lifetime most gifts that aren’t exempt under the above provisions aren’t immediately subject to inheritance tax, but are potentially exempt transfers (PETs).
If the donor dies within seven years of making the gift, inheritance tax may become payable on PETs. The charge is on the value of the gift at the date the gift was made and is then taxed at the rates applicable when the donor dies. The tax is paid by the person who received the gift, also known as the donee.
Tapering relief may reduce the inheritance tax liability if the donor survives for more than three years but less than seven. Under these rules, the gift attracts no relief for the first three years. It then attracts 20% after 3 years, and that rate increases by 20% per year until it drops out completely after year 7. The reduction is on the rate of tax, not the amount subject to tax, and therefore only applies if the value of the gift exceeds the nil rate band (currently £325,000) on the donor’s death, and a liability to tax arises.
Care should be taken before making any gift as although inheritance tax may be avoided by making a lifetime gift and surviving seven years, an immediate liability to capital gains tax may arise instead.
Gifts on Death
(a) Assets transferred between a husband and wife on death are exempt for inheritance tax purposes provided they both live in the UK. If the surviving spouse is not a UK resident, Spouse Exemption is capped at £55,000.
(b) Assets left to charities on death are exempt.
(c) Everyone has a nil rate band to give away where the inheritance tax charge on assets within this band is 0%. The nil rate band is offset against any lifetime gifts (PETs) made within the seven years before death first and if there is any balance left over, it’s offset against assets at the date of death.
From October 2007, where an individual dies and their spouse has died before them and not utilised all or part of their nil rate band, the percentage of the nil rate band unused on the estate of the first spouse to die can be transferred to the estate of the second spouse to die.
Let us use Mr & Mrs White as an example. The couple each have assets worth £400,000, and Mr White dies first, leaving everything to his wife. There is no tax on his death because gifts between spouses are exempt,meaning Mrs White now has £800,000 in assets.
Mrs White then dies leaving everything to her children:
Total Estate £800,000
Less nil rate band for Mrs White £325,000
Less nil rate band transferred from Mr White’s estate £325,000
This leaves £150,000 of the estate that can be taxed. At the rate of 40%, £60,000 would be paid in  tax, leaving £90,000 of the taxed funds to be passed on to Mrs White’s children, meaning the total estate is worth £740,000.
The benefit of the transferable spouse allowance is that whilst it is the percentage of the deceased spouse’s unused allowance which is transferred, it is calculated at the current nil rate band rate, not the rate applicable when the spouse first died.
(d) To maximise the tax efficiency of your estate, you need to have sufficient assets belonging to each spouse which can be passed down. It may be beneficial to change the ownership of assets, but it’s very important that you ensure this doesn’t have tax or financial implications during your lifetime.
(e) Your Will needs to be tailored to your individual circumstances. Greater tax savings may be achieved where there are special types of assets involved, such as a business. Some lifetime planning measures may also be recommended.
(f) If a Will hasn’t been prepared in order to mitigate inheritance tax planning, the beneficiaries have the ability within two years after a person’s death to change the way the assets are dealt with through a Deed of Variation. However, this scheme is subject to threat and shouldn’t be relied upon as an alternative to having a valid Will in place.
(g) Death benefits under personal pension plans or insurance policies may be subject to inheritance tax. Tax protection can be achieved by putting the policies into trust. Similarly, death benefits under an employer’s scheme can be subject to inheritance tax and a valid and up-to–date nomination should be put in place.
(h) Insurance policies can be taken out specifically to provide funds to pay inheritance tax. Such policies should be put in trust.
Disclaimer: The author accepts no responsibility for actions taken as a result of the above article. When considering legal proceedings legal advice should be sought. For the most up-to-date information and advice tailored to your personal circumstances call our Wills, Trusts and Probate Team who will be more than happy to assist.
This article was originally published on search4solicitors.com.

Inheritance Tax is payable on your assets when you die, but brings within its scope certain lifetime gifts, and there are a number of ways it can be reduced or avoided entirely. This article will provide you with some basic information in order to help you decide whether you need further inheritance tax planning advice.

Leaving a gift in your will to charity is one way you can make a difference, not only to the cause of your choice, but also to your friends, family, and other beneficiaries. Legacy gifts are exempt from inheritance tax, meaning that not only will all of the money you leave make its way to your intended charity, but the gift may also help bring the value of your estate below certain taxable thresholds.

 

Lifetime gifts

Certain lifetime gifts attract exemptions from inheritance tax:

  • Gifts between a husband and wife or civil partners (UK residents): no limit
  • Gifts to charity (UK): no limit
  • Annual exemption each tax year per donor: £3,000
  • Small gifts to any number of persons: £250
  • Wedding gifts by parents £5,000; remote ancestor £2,500; party to marriage £2,500; others £1,000
  • Gifts which are normal expenditure out of income: no limit

During a person’s lifetime most gifts that aren’t exempt under the above provisions aren’t immediately subject to inheritance tax, but are potentially exempt transfers (PETs).

If the donor dies within seven years of making the gift, inheritance tax may become payable on PETs. The charge is on the value of the gift at the date the gift was made and is then taxed at the rates applicable when the donor dies. The tax is paid by the person who received the gift, also known as the donee.

Tapering relief may reduce the inheritance tax liability if the donor survives for more than three years but less than seven. Under these rules, the gift attracts no relief for the first three years. It then attracts 20% after 3 years, and that rate increases by 20% per year until it drops out completely after year 7. The reduction is on the rate of tax, not the amount subject to tax, and therefore only applies if the value of the gift exceeds the nil rate band (currently £325,000) on the donor’s death, and a liability to tax arises.

Care should be taken before making any gift as, although inheritance tax may be avoided by making a lifetime gift and surviving seven years, an immediate liability to capital gains tax may arise instead. There are also some gifts, in particular gifts to trust funds, which will give rise to an immediate charge to inheritance tax.


Gifts on death

(a) Assets transferred between a husband and wife on death are exempt for inheritance tax purposes provided they both live in the UK. If the surviving spouse is not a UK resident, Spouse Exemption is capped at £55,000.

(b) Assets left to charities on death are exempt.

(c) Everyone has a nil rate band to give away where the inheritance tax charge on assets within this band is 0%. The nil rate band is offset against any lifetime gifts (PETs) made within the seven years before death first and if there is any balance left over, it’s offset against assets at the date of death.

From October 2007, where an individual dies and their spouse has died before them and not utilised all or part of their nil rate band, the percentage of the nil rate band unused on the estate of the first spouse to die can be transferred to the estate of the second spouse to die.

Let us use Mr & Mrs White as an example. The couple each have assets worth £400,000, and Mr White dies first, leaving everything to his wife. There is no tax on his death because gifts between spouses are exempt, meaning Mrs White now has £800,000 in assets.

Mrs White then dies leaving everything to her children:

Total Estate £800,000

Less nil rate band for Mrs White £325,000

Less nil rate band transferred from Mr White’s estate £325,000

This leaves £150,000 of the estate that can be taxed. At the rate of 40%, £60,000 would be paid in  tax, leaving £90,000 of the taxed funds to be passed on to Mrs White’s children, meaning the total estate is worth £740,000.

The benefit of the transferable spouse allowance is that whilst it is the percentage of the deceased spouse’s unused allowance which is transferred, it is calculated at the current nil rate band rate, not the rate applicable when the spouse first died.

(d) To maximise the tax efficiency of your estate, you need to have sufficient assets belonging to each spouse which can be passed down. It may be beneficial to change the ownership of assets, but it’s very important that you ensure this doesn’t have tax or financial implications during your lifetime.

(e) Your will needs to be tailored to your individual circumstances. Greater tax savings may be achieved where there are special types of assets involved, such as a business. Some lifetime planning measures may also be recommended.

(f) If a will hasn’t been prepared in order to mitigate inheritance tax planning, the beneficiaries have the ability within two years after a person’s death to change the way the assets are dealt with through a Deed of Variation. However, this scheme is subject to threat and shouldn’t be relied upon as an alternative to having a valid will in place.

(g) Death benefits under personal pension plans or insurance policies may be subject to inheritance tax. Tax protection can be achieved by putting the policies into trust. Similarly, death benefits under an employer’s scheme can be subject to inheritance tax and a valid and up-to–date nomination should be put in place.

(h) Insurance policies can be taken out specifically to provide funds to pay inheritance tax. Such policies should be put in trust.

 

Disclaimer: The author accepts no responsibility for actions taken as a result of the above article. When considering legal proceedings legal advice should be sought. For the most up-to-date information and advice tailored to your personal circumstances call our Wills, Trusts and Probate Team who will be more than happy to assist.

This article was originally published on search4solicitors.com