IHT Planning: use of Trusts
Inheritance tax (IHT) is a concern for an increasing number of home-owners as house prices continue to rise, with property forming the majority of many people’s assets. IHT is payable when someone dies and leaves an estate worth more than £325,000. It must be paid at 40% on the value of the property over this amount.
This can reduce the amount which can be passed on to family or friends significantly, so managing IHT is a priority for many people.
You can ‘gift’ some of the value of your estate to others in a number of ways. In some of these cases, IHT will not be due:
• If a charitable donation of more than 10 per cent of the estate is made, you will only pay tax at 36% over the threshold amount.
• No IHT will be due if you make a gift to a spouse or civil partner, provided they own a home in the UK.
• You can also give a gift to mark a marriage or civil partnership or to support a relative, a charity, some national institutions and political parties.
• You can gift up £250 to as many recipients as you want, or gift £3,000 to one recipient each year (if you don’t use this allowance it can be carried forward to the following year).
• Gifts can also be made from income as long as making the gift doesn’t affect the donor’s standard of living.
There are other situations where you can make a gift which will remain exempt from IHT if you live for more than 7 years after the gift is made (known as potentially exempt transfers). Property is a good example of this situation but the rules surrounding selling your home and IHT can be complex.
Often a potential donor is concerned that by making a gift while they are still living, they may find they need the money at a later date. One option is to set up a trust, which can include property, land or money. Setting up a trust does not guarantee that no IHT will be due but it can reduce the amount to be paid.
Two possible solutions to this are:
• The Gift and Loan Scheme, which involves setting up a trust with an initial gift of £1, then lending the trust a larger amount, repayable on demand.
• The Discounted Gift Trust, which allows a donor to make an outright gift (usually invested in a bond) but receive an ‘income’ from it, as well as potentially paying lower IHT on the initial gift, depending on the donor’s age and health.
Regardless of how you plan for inheritance, it’s crucial to make a will and review it regularly.
This kind of tax planning is complicated and we would recommend taking advice if you are considering how best to pass on your estate. We can provide detailed expert advice tailored to your situation.
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Call us on 020 7330 0000 or email firstname.lastname@example.org to talk about your estate planning needs.