Lessening The Burden of Property Inheritance Tax
Despite the property IHT threshold being raised in the
recent budget, many people are still getting caught in the trap of property
inheritance tax. Property IHT has not kept pace with the inflation of property
prices, and so is affecting more and more people. However, there are a ways to
lessen the burden of property IHT.
Is property IHT a problem?
Property inheritance tax is becoming a problem for more
and more people, and if you do not take steps to reduce property IHT, then you
could lose up to 40% of an estate to tax. The government now makes over £3
billion a year on property IHT. However, with the correct IHT tax strategy
these problems can be reduced.
Can property IHT be avoided?
Property IHT is one of the most avoidable taxes, and if
you hire a good Financial Adviser you should be able to get rid of most of the property
IHT burden. The easiest way to do this is through your will. If you examine
your will in terms of IHT tax strategy, you will help to reduce the property
IHT burden. There are a number of different methods that can help:
Leave it to your spouse
One of the easiest ways to eliminate property IHT is to
leave your property to your husband or wife. Property left to your spouse is
exempt from property IHT, and so you will not lose any of the value through
tax.
The Nil-Rate band
Although leaving the property to your spouse eliminates property
IHT for them, it still poses a problem for your children. Once your spouse
dies, anything about the tax threshold will be taxable for your children. To
stop this happening, you can split the value of the property between your
family. Once the first parent dies, you can leave the Nil-Rate tax amount to
your children, and then the rest to your spouse. This way you will avoid paying
most of the property IHT.
If your children are at all
likely to be landed with a tax bill, - and, of course, if you can afford it -
you should consider making use of your Nil-Rate Band when the first parent
dies, rather than waiting until you have both expired. Obviously, you cannot be
sure which of you will die first, so it is important to try and split your
asset ownership as equally as possible so that this IHT tax strategy can work
either way.
Discretionary
Will Trust
Another way to avoid property
inheritance tax is to set up a Nil-Rate Band Discretionary Will Trust. This
arrangement means that beneficiaries can borrow back assets in the trust in the
form of an interest-free loan, and when they die the loan is paid from the
property value. These trusts have recently been made more widely available, and
can be used by married and unmarried couples as well as single people.
Potentially
Exempt Transfers
If you can afford it, a simple IHT
tax strategy is to just give away as much as you can whilst you are still
alive. This is known as a Potentially Exempt Transfer. Anything you give away
is property IHT free as long as you survive for seven years after giving it
away. This means you can sign your property over to your children or partner,
and they will not have to pay property IHT on it. Of course, this is a
balancing act between signing it over early enough that you survive the seven
years, and not signing it over too early so that you do not have enough money.
Specialised trusts
Perhaps the most affective way to reduce the burden
of property IHT is through the use of specialised trusts. There are four types
of trust in that are most commonly used: Interest in Possession; Life Interest;
Discretionary; and Accumulation & Maintenance. With the correct advice from
legal professionals these trusts can help to reduce or eliminate the property
IHT burden. However, they are complex documents and without the proper legal
expertise can be dangerous and damaging. It is also important to remember that
once something is put in trust you know longer have access to that capital, so
you need to make sure you can afford to do this. For more information about
trusts, you should consult a legal professional.
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Property IHT is becoming more of a problem for
everyday people, but with the right IHT tax strategy, property IHT can be
easily avoided.