Inheritance and Tax; what are the real rules?
Tax and Inheritance have been in the press a lot recently. The Prime Minister, David Cameron, and his Chancellor, George Osbourne, have been having their affairs scrutinised in the wake of the Panama Papers scandal.
The problem - as usual - is that journalists risk confusing the rest of us as they seek to twist the story to fit with the political agenda of whichever media outlet they happen to be working for.
Depending on the newspaper you read they are either prudent savers or greedy tax dodgers; so what it the truth?
Inheritance Tax, otherwise known as ‘the voluntary tax’
The term ‘voluntary tax’ has been given to Inheritance Tax (IHT) by financial advisers for years. This is simply because there have always been many (completely legal and above-board) ways to manage your IHT liability.
In fact the only reason that HMRC does so well out of IHT is because so many people are simply disorganised.
Everyone is entitled to a tax free allowance of £325,000. This figure includes your entire estate, so as long as everything you leave behind comes to less than £325,000 there will be absolutely no tax to pay.
For every £1 over the £325,000 threshold you pay 40% in tax.Until recently this meant that only wealthy people payed IHT.
However with the huge leap in house prices here in London and the South East, IHT has become a reality affecting almost every homeowner in the region.
The problem comes from people having to sell their family homes to pay the IHT bill simply because property prices have sky rocketed around them.
Creating Trusts to protect family assets
Trusts are a very common way of protecting assets, such as a family home, from this scenario.
Discretionary Trusts and Family Trusts are widely used and perfectly legitimate ways of keeping property or other assets in the family.
They are especially useful if you have vulnerable loved ones. These have been in use since time immemorial and are open to anyone who wishes to set one up.
We have over a decade’s experience when it comes to Trusts and have set them up for Haringey residents across the borough, from all walks of life.
This has been quite a controversial topic in recent weeks, after the revelation that David Cameron received a £300,000 gift from his mother following his father’s death.
The truth is that we are all entitled to gift as much money as we like. You can gift up to £3,000 a year to loved ones completely tax free. Anything above this amount carries a seven year survival clause.
This means that if you die before seven years have passed this money becomes liable for IHT. This is charged on a sliding scale, so if you die within three years the full IHT liability of 40% is payable, it then reduces by 20% every year until the seven year time limit has passed.
Know your rights and plan ahead
Regardless of where you sit on the political spectrum, you should know what you and your family are entitled to and make sure that you take advantage of your allowances to ensure that you do not end paying more than your fair share of tax.
When making a Will it is the perfect time to get your affairs in order, so make sure you talk to your consultant about these things and they will guide you in the right direction.
To book a free consultation please contact us on 0800 29 88 66 1