Passing on Money - Inheritance Act

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Inheritance Tax Tips

Use your tax-free slice If you are married, you may be tempted to leave everything tax-free to your husband or wife. But because bequests to children and other relatives or friends are not tax-free, there could be a hefty tax bill when your husband or wife then dies and everything passes to other members of the family. If your husband or wife does not need all your money and assets, consider sharing them between your spouse and other family members, making sure that the bequests which are not tax-free fall within your available tax-free slice.

Make lifetime gifts provided you can afford to make gifts during your lifetime, this is a good way to reduce the value of your estate, because many gifts are completely tax-free. Most other gifts between individuals count as potentially exempt transfers (PETs) and become taxable only if you die within seven years of making them (and, even then, only if the total of gifts made over the seven years up to the PET comes to more than the tax-free slice).

Tax-free lifetime gifts include:

• Gifts between husband and wife.
• Gifts to charities o a regular pattern of gifts - for example, premiums for a life insurance policy - which count as normal spending out of your income.
• Any number of small gifts up to £250 per person o wedding gifts up to certain limits o up to £3,000 of any other gifts each year (or up to £6,000 if you did not use up the limit in the previous year).
  
  

Give away things whose value will rise. The increase in value then benefits the person to whom you make the gift rather than swelling your estate. Use life insurance. You can pay the premiums (using one of the lifetime gift exemptions) on an insurance policy to benefit someone else. In this way, you can make an outright gift or you can ensure that the proceeds of the policy are available to pay an expected inheritance tax bill.

Seven-year decreasing term insurance can be used to cover the potential tax bill on a PET. More complex schemes If you have a large estate, you might be attracted to schemes which use loans, trusts and businesses to reduce the value of your estate. These can become complicated and, if not carefully set up, can fall foul of the tax rules, which disallow artificial methods of avoiding tax.

Get professional advice. Altering a will after death If all the beneficiaries of your will agree, they have two years following your death within which they can alter the bequests made under the will by drawing up a 'deed of variation'. This could be done to reduce or eliminate an onerous tax bill.

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