Stories of large companies avoiding tax litter the news, but those are companies have purposely exploited loopholes and international trade agreements to avoid paying a fair rate of tax. That doesn’t mean it is immoral to avoid unnecessary tax and in fact, it is perceivable to consider HMRC as acting inappropriately by not advising people of the best or most tax efficient method of investing their money and receiving the resulting income. What is even more worrying is that succession planning is taxed heavily and the money, if from an estate, has already been taxed many times before.
How HMRC Taxes Inheritance
Anyone who receives an income in the form of inheritance will need to pay tax on that income if it reaches the inheritance tax threshold. The current inheritance tax threshold of £325,000 is in force until April 5th 2015 and that means any estate worth over £325,000 will pay 40% tax on the amount that breaches the threshold. So for example, an estate worth £325,001 is just one pound over the threshold and this would mean there is 40 pence of tax to pay.
You can’t simply avoid tax by giving someone gifts just before you die because any gifts given in the seven years prior to death count towards the overall estate. This is to avoid the obvious move by people who are diagnosed with terminal illness or have low expectations of making it through the next few years. However, here are a number of ways you can legitimately minimise any tax on your estate:
1. Create a Will
You need to have a will in place if you want to control how your estate is distributed. A Spouse may not need to pay inheritance tax, but other members of your family may come forward and lay claim to a portion of your estate if you have no instructions in place. This form of distribution will attract the taxman.
2. Avoid the Seven-Year Rule
Consider the benefits of seeing your loved ones benefit from some inheritance before you pass on. Giving gifts more than seven years before your death will ensure there are no hidden surprises that push your state over the threshold when your time comes.
3. Give in Stages
You can give anyone £3,000 as a gift without worrying about inheritance tax and that amount rises to £5,000 if the gift is a wedding present. The recipient may need to declare the money as income, but that is unlikely to be an issue and unless the recipient is a high earner, they would still benefit from a reduced tax rate if they need to pay any tax at all.
4. Use Family Trusts where Possible
Family trusts protect gifts from inheritance tax up to the threshold limit, but the control of the trust remains with the original trust creator. You still need to be aware of the seven-year limit, so making a trust sooner rather than later is a good idea.
5. Close Tax Efficient Saving Accounts
Savings kept in the tax-free savings accounts known as ISAs or Peps are not protected from any taxation when inheritance is due. Taking your money and either using it in one of the above outlined methods or spending it to reduce the overall size of your estate can benefit your loved ones when the time is right.
None of the methods mentioned here are remotely immoral, but they are simple guidelines that help your family benefit as much as possible from the accumulation of your life’s work. You will have paid tax on your income and possibly on your pension contributions if you exceeded your annual allowance at any time. Additionally you may have been taxed when you withdrew your pension so nobody can argue a case against you if you are as tax efficient as possible.
Paula Whately is a writer who believes that you should consider succession planning as early as possible to ensure that you and your family pay as little tax as possible. To help you understand how to sort inheritance tax limitations, you should contact will solicitors for more information.
Succession Planning For Minimum Tax by Steven R Patterson