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One of the topics that deeply divides people is whether they should undertake any planning to mitigate the Inheritance Tax liability that their beneficiaries will face when they are gone. For some, by the time the tax is payable they are no longer here so they are not concerned. For many others they want their families to benefit from the assets they have accumulated throughout their life, especially because those assets have been purchased from income that has already suffered tax.
As many will already know every individual can own £325,000 of assets and not suffer any Inheritance Tax. If you are married then you can hold £650,000 of assets before your estate suffers tax. Whilst this may seem like a very large figure it is incredible how many people realise their assets exceed this amount when they sit down and add up all the assets they own. The family home will probably be the biggest asset but to this you add all your belongings, cars, life insurance proceeds (if not written in trust), investments and bank accounts (including ISAs) both in the UK and offshore. Furthermore, if you own a second property this needs to be added to your assets to get the total of your estate.
The values of many of these assets will be depressed in the current climate but you also need to consider whether these assets are likely to grow in your estate before you die, which is, of course very difficult to predict. I have spoken to many clients who have undertaken such an exercise only to discover to their surprise that they exceed the limits mentioned above and this means their beneficiaries will suffer some tax.
There are things that can be done to reduce your liability but generally you need to give away an asset so you no longer benefit from it. However, if you do benefit from the asset and this particularly catches those who give away their home and continue to live there, the asset is simply added back into your estate, so the planning has achieved nothing. For this reason alone giving away your home to try to avoid Inheritance Tax is almost always the wrong thing to do. Often it makes matters worse.
Perhaps the important thing to bear in mind is that if you will be affected and you want your family to benefit from your assets you really do need to start reviewing your assets as soon as possible. In particular look at those assets that do not generate you an income and decide if they could be gifted now whilst their value is perhaps lower. However, when considering giving away assets, firstly make sure you do not need the asset or its capital value in the future. Secondly watch out for other taxes such as Capital Gains Tax on any gifts as this can be an equally unwanted surprise.
If you are affected by Inheritance Tax and you want your family to benefit then seek out professional advice because the consequences of not doing so can be even worse than the tax liability for your beneficiaries.
Graham Poles - Tax Director
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