Avoid inheritance tax - for rich people only!

Inheritance tax advance strategy

The following article does not constitute financial advice. Please seek financial advice from a qualified professional only. The purpose of this article is simply to state potential options to help reduce your tax bill. It is not stated with the intention for anyone to follow as a guidebook for tax planning. I will repeat: always seek advice from a suitably qualified professional.

This article follows on from my previous article on inheritance tax planning. However, the difference is that this article is specifically for wealthy individuals only. Furthermore, this type of tax planning involves some risks.

One of the funny things about life is that when you're young and can best use the money you have none, and when you're old you will probably be at your wealthiest but with less need to use the money. Given this fact, it may be the case that you want to give your children some money. What follows is an explanation on how to transfer income to your loved ones and to reduce the inheritance tax charge paid by your children.

One of the biggest assets that most people pass on once they've "finished retirement" is their house. Given recent house price increases, many families may find themselves with a hefty tax bill given the threshold for inheritance tax currently at £325,000. 

Inheritance tax - the solution

One option could be to transfer your house to your loved ones. in decent time before you pass away. Obviously you can't predict when you'll die but you can make a decent guess as to when might be best (I.e. 65 is probably better than 85). The house may still be liable to inheritance tax, especially if you're still living there, as the taxman would deem that you are still benefiting from the asset and haven't really passed it on.

One way around this problem is to pay your loved ones a rent equivalent to the market determined rate for other houses in your area. This will mean that your children/ loved ones are your landlord. It will demonstrate that you have truly passed on your house. It's also a very good way to pass on an asset to your children/ loved ones, and to help them financially over the remainder of your life.

The risks with reducing inheritance tax

Of course there are risks with this scheme. The first being that you may run out of money. You need to make sure that you have plenty of cash each month to be able to pay the market rent until you die. Secondly, and more importantly, make sure you have a good relationship with your loved ones. Being a tenant means that your loved ones could potentially kick you out of their house if they wanted. Furthermore, let's say you give the house to a child who is married and they get divorced. Your child's ex may be entitled to half the house. In which case it will need to be sold. Be warned.

Finally, make sure you seek proper legal and financial advice before taking any financial or legal decisions, especially with regard to your inheritance.

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