Avoid inheritance tax

Reducing inheritance tax bill

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.

Inheritance tax - the situation so far

Currently, when a person dies their estate is valued. The deceased can pass on up to £325,000 of their estate onto loved ones. Any inheritance in excess of this amount will be taxed at a whopping 40%!
There are all sorts of caveats to this, with certain types of businesses having different exemptions. Apparently, passing on a sheep farm in inheritance is exempt!

"7 years A'tapering"

There are many inheritance tax rules, however, I will cover just one - Tapering. 

If you have an elderly relative who gives you £100,000 and then 6 months later they sadly pass away the Tax Man determines that the full £100,000 should be treated as part of the deceased's estate. That means that if they have a house worth £325,000 then the full £325,000 Inheritance Tax free allowance will be used on the house. Hence, you will pay inheritance tax at 40% on the £100,000 that your loved gifted to you, costing you a hefty £40,000! They don't call it the death tax for nothing!

However, should your loved one give you the £100,000 over three years ago, then the tapering effect comes into play. As such, if your loved one died over three years ago then you only owe HMRC 80% of the inheritance tax owed on the gift. In this case, it would be 80% of £40,000, which would be £32,000. 

The longer the length of time between the transfer of money from your loved one and they sadly passing away, the less tax you pay. Between four and five years, you only pay 60% of the inheritance tax owed. That's 60% of the £40,000 in this case only £24,000 between five and six years, only 40% of the 40% tax owed, £16,000. Between six and seven years 20%, £8,000. Finally, if your loved one transfers gifts in the form of inheritance seven years or more before their death, then you will pay no inheritance tax at all!

Inheritance Tax Planning

So it's pretty clear. If you want to reduce the inheritance tax bill to your children or loved ones, you got to start transferring your assets to them as quickly as possible (assuming you don't need them anymore).

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