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01495 763333

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Newport Office - 01633 251801

Pontypool Office - 01495 763333

Passing your wealth on effectively

Passing your wealth on effectively

Despite the falling asset prices in the recession, some people are still fortunate enough to need to be concerned about whether inheritance tax will be payable on their estate after they die. If so, there may be action they can take to reduce or eliminate the inheritance tax bill. After all, most of us have had to work hard and pay tax to accumulate what we have got, and would be reluctant to see it taxed again, at 40% (the current rate of inheritance tax payable on death on that part of the estate exceeding the “nil rate band”) before the remainder can be passed on to loved ones.

The main idea of legitimate inheritance tax avoidance is to make use of reliefs laid down by law in order to reduce the inheritance tax burden on the estate.

The first thing to be aware of is what does not work. Generally speaking, giving away property during your lifetime will not work if you do not live for 7 years after the date you made the gift. It certainly will not work if you continue to use the property after you have given it away, no matter how long the time period may be between the date of making the gift and the date of death. So putting your house into the children’s names while you continue to live there will not avoid inheritance tax, as the house will still be considered part of your taxable estate on your death.

However, if you have the cash and want to give it away to avoid inheritance tax, it is worth noting that you can give away £3,000 every tax year (all to one person, or split between several, as you please) without it being taken into account for inheritance tax, even if you should die within 7 years of making the gift. If you did not make a gift in the previous tax year then you can give away £6,000 in the current tax year free of tax. With couples, each can make such gifts.

If your income is high enough, you can give away larger amounts, providing that your income more than covers the amount you are giving (without having to dig into your capital), that you are able from your remaining income to maintain your normal standard of living (whatever that may be in your particular case) and that the giving is part of your normal, habitual or typical expenditure – it would normally be enough to give regular monthly amounts over a period of a number of years. So the best thing to do is to set up a monthly standing order, and keep detailed records and documents concerning your income and expenditure so that it can be proved to the Revenue after your death that your giving fulfilled the above conditions.

If you have yourself recently received an inheritance, and you would like to pass part or all of it on to the next generation without risking the gift being taxed as part of your estate, then the best way to do this is normally to have a document drawn up called a Deed of Variation, the effect of which is that the gift is deemed to bypass your estate altogether. You should take legal advice on this.

Until recently, a common way for married couples to avoid inheritance tax would be for them to make wills to the effect that on the death of the first to die, part of the deceased’s property was to go into a trust, where it would be available to the surviving spouse to the extent needed, but would not count as part of that spouse’s estate for inheritance tax purposes. Generally speaking, since a change in the law a couple of years ago, that is not necessary any longer, as it has no clear-cut tax advantage. The reason is that the government has given the estate of the surviving spouse a tax advantage (in appropriate circumstances) in another way, without the need for the will trust. People who have already set up such arrangements should take legal advice as to whether they should still retain the arrangement. However, where one or both members of a couple have previously been widowed before, if their joint estate is large enough, there can still be tax advantages to a will trust scheme. Again, legal advice should be taken.

In thinking about passing wealth down the generations, another concern is whether the house may have to be sold to pay for nursing home fees. If a couple (whether or not married) own their home jointly, then it is normally possible by way for their wills to ensure that if the longer-lived member of the couple eventually has to go into a home, the share of the house which was owned by the other member of the couple is ring-fenced by means of a trust, so that that part of the value of the house at least does not end up going on home fees.

If you are a farmer, you are probably aware that agricultural property relief on agricultural property, including the farmhouse, can be claimed to reduce or avoid an inheritance tax bill after death. You should also be aware, though, that if before your death you retire, in the sense that you are no longer actively farming the land yourself, then the relief may be lost, particularly on the farmhouse. Consider taking legal advice on ways of avoiding this situation.