When you left the world, the Government evaluates how much your estate is worth. This includes the cash you have in the bank or in investments, any property or business you own, vehicles - even some payouts from life insurance policies. It then deducts your debts from this to give the value of your taxable estate.
If this go beyond the inheritance tax threshold , currently £325,000 as set by the Chancellor, you (or technically your estate) will pay tax at 40% on the amount over and on top of the threshold when you die. This can compact if you go away a certain amount to charity.
Dealing with it is one of the major single Money Saving things you can do, as some simple actions can save you £100,000s. Yet unhappily many people ignore it, either not wanting to consider it or simply just remain delaying it for later.
It's time this is dealt with right away.. As Benjamin Franklin said, the only things that are certain in life are death and taxes, and these touches on both of them. So, whether you stand to be left, or leave the money, it's time to sit down and undertake these issues with your family. Don’t try to express it in soft terms, the better and easies way is to be matter-of-fact and go for it head on.
Wills
It is significant for you to create a will depending on your conditions. It is important to make a will because:-- If you left the temporary world without a will, there are certain rules set by the state, which say how the money, property or belongings should be allocated. This may not be the method that you would have wished your money and belongings to be spread.
- unmarried and married partners who have not registered a civil partnership cannot inherit from each other unless there is a will, so the death of one partner might create critical financial problems for the other partner.
- If you have children, you will need to make a will so that arrangements for the children can be completed if either one or both parents die.
- It may be probable to decrease the amount of tax payable on the inheritance if advice is taken in advance and a will is made.
- If your situation has changed, it is significant that you make a will to ensure that your money and belongings are distributed according to your wishes. For example, if you have separated and your ex-partner now lives with someone else, you might want to change your will. If you are married or go into a registered civil partnership, this will make any previous will you have made worthless.
Gifts
The majority gifts made at the same time as you are alive can help to run off Inheritance Tax. The three types of gifting as currently applied are:- Exempt Gifts: The main gifts that receive exemption from Inheritance Tax are as follows: to your spouse, annual exemption, small gifts exemption, normal spending out of income, gifts in deliberation of marriage, gifts to UK registered charities, gifts to the main political parties, gifts for National purposes (e.g. National Trust, museums and galleries).
- Potentially Exempt Gifts: Any gift not covered by the above exemptions will usually be a Potentially Exempt Transfer (PET). These are legally responsible to Inheritance Tax for up to seven years, after which time the gift is completely exempt.
If death occurs within seven years of the gift being made it is likely that the full amount of the gift will be included in considering the value of the departed estate. However, some gifts can be reduced by narrowing Relief, but this would only be relevant if the total gifts exceeded the value of the Nil Rate Band.
- Chargeable Gifts: A chargeable gift is broadly, any gift which is not covered by exemptions and given to the Trustees of a relevant Property Trust or Company.
Other Considerations When Gifting
- Gift with Reservation: To be effective for Inheritance Tax a gift have to be absolute and unrestricted. If you still keep or continue to enjoy a benefit from it, this will be treated as a "Gift With Reservation" and its full value will remain within your estate for the calculation of Inheritance Tax.
- Affordability: Your circumstances will say aloud how much you can afford and whether gifts will be made frequently or on a lump sum basis.
- Capital Gains Tax (CGT): Gifts concerning current assets may have CGT implications, so advice must be taken prior to transferring or en-cashing any assets or investments.
- Control: You may not want to make outright gifts for fear of losing control. The solution in this instance may be to use a Trust. However, specialist advice is needed to ensure it is applied correctly
For details of the values and specifics of a variety of gift entitlements please speak to one of our advisors.
* Tax information given is based on the 2014/2015 tax year, and may be subject to change in the future. Please note, normally the passing of assets between spouses does not have a liability to inheritance tax.
Trusts
Many people establish trusts in order to administer their assets whilst they're living, and to transfer those assets at the time of their death. Trusts allow you to transfer ownership of property or money to a person who is designated to manage and distribute the assets according to your instructions, for the benefit of another.A number of trusts may provide important tax advantages, while others are for the benefit of persons not capable to handle their affairs. Other trusts provide income for a spouse or a child or a beneficiary who is not included among your heirs.
The person who set up the trust is called the “grantor.” The person who runs the trust is known as the “trustee,” and the people who ultimately receive money or other assets from a trust are called “beneficiaries.”
Trusts also are essential if you have minor children. You can specify in your will that any money left to children who are under a certain age, be positioned in a trust for their advantage until they reach the age stated in the deed. You appoint a trustee, who will see that the money is properly invested and obtainable for the child when wanted. When the child reaches the age affirmed in the document, the trust is dissolved and the child receives the remaining assets. In most cases, income tax on the money earned by the trust is taken out of the trust until the child reaches the age stated in the deed. At that time, the child generally has to pay income tax.
There are different types of trusts, but all fall under two basic types: revocable and irrevocable. Revocable means changeable, irrevocable means it's beyond your control once set up—it's not changeable. Within each category are various types of trusts.