The charity discount
There's a reduced rate of Inheritance Tax of 36% for those who leave 10% or more of their estate to charity.
The move will hit the Government’s coffers to the tune of around £170 million a year by 2016, but serves an important political purpose – if the Government’s Big Society folly is to work at all, it relies on charities stepping into the breach and filling the gaps left by public sector cuts. And that won’t happen without further funding.
Of course, in reality, your loved ones won’t be any better off if you go down this route – you’ll just ensure that some of your bill goes towards a good cause, rather than to the Treasury! You can find out more information on what qualifies at the HMRC website.
However, there are ways you can actually make a difference to the final Inheritance Bill your estate faces.
If you want to sidestep Inheritance Tax, you may want to get giving! We all have a £3,000 limit each year for gifts, which is completely free of Inheritance Tax. What’s more, if you don’t use your allocation this year, it can be carried over to next year, so you can hand over £6,000 to a loved one, tax-free!
You can also give away £250 to any number of people every year, though you can’t combine it with the £3,000 annual allowance.
Weddings also offer an opportunity to avoid Inheritance Tax. Parents can give their children £5,000 each as wedding gifts, £2,500 to grandchildren, or wedding gifts of £1,000 to anyone else. There are hoops to jump through though. The gift must be made (or at least promised) on or shortly before the day of the wedding. If you make the gift after the ceremony, without having promised it earlier, or if the ceremony is called off, it will no longer be exempt.
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Indeed, you can even leave cash to a political party free of tax too! However, not all parties qualify – they will need to have at least two members elected to the House of Commons, or one member where the party received at least 150,000 votes. So if you fancy leaving your estate to the Monster Raving Loonies, or the Animals Have Rights Too party (who appeared on my ballot paper in the last set of local elections), your gift won’t be free of tax.
Finally, regular gifts that come out of your income (say a monthly payment to a family member) are also exempt so long as they do not affect your standard of living.
Potentially exempt transfers
You can actually make additional gifts, above and beyond those detailed above, without the taxman trying to claim a slice. These are known as ‘potentially exempt transfers’.
All you have to do is live for seven years after making the gift. If you die within seven years of making the gift, and the total value of the gifts is valued at less than the Inheritance Tax threshold, then it will be added to the value of your estate. However, should the gifts be valued at more than the Inheritance Tax threshold, then either the person receiving the gift or the person managing your estate will need to pay Inheritance Tax on its value.
All simple so far, but since this is Revenue & Customs we are dealing with, there’s room for a bit of added complexity! Should you die between three and seven years after making the gift, and the value of the gifts is valued at more than the Inheritance Tax threshold, then the tax due is reduced on a sliding scale. For a full run-down on the ‘taper relief’, check out this section of the HMRC website.
Don't forget your life insurance
If you have a life insurance policy, should you die, the payout to your relatives may actually be subject to Inheritance Tax. That’s because the payout will be added to the value of your estate. What’s more, it can then take months before your family receives the cash. It’s all far from ideal.
However, you can have the policy written in trust. This basically separates the policy from the rest of your estate, ensuring you won’t pay tax on it. It also helps to speed up the process of your family receiving the cash.
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