Is inheritance tax a voluntary tax?
Inheritance Tax (IHT) has been charged in Britain for hundreds of years, and was first introduced as part of the Stamps Act 1694, in order to help fund the war of the league of Augsburg.
Nicknamed the “death tax”, it is paid when a person dies and leaves their assets to their beneficiaries, normally via instructions set out in their will. IHT is often seen as one of the worst taxes to pay, and Benjamin Franklin famously said, “the only things certain in life are death and taxes”. Inheritance Tax touches on both.
IHT is charged on a deceased person’s “estate” at a rate of 40% above a threshold, currently set at £325,000. In other words, when you leave this world, Her Majesty’s Revenue and Customs (the tax authorities) will add up everything you own, subtract a figure of £325,000, and then tax the remaining amount at 40%. Ouch.
Assets that are taxable include:
· Cash & Investments
· Chattels (Art, Jewelry, Family Heirlooms)
· Cars & Property
· Business Interests
When the heirs loom.
To give away (bequeath) one’s assets in a will to loved ones, or a cause which is dear to them, such as the local charity, should in many people’s eyes, be a fundamental right. How can one not be allowed to provide for your children when one has passed?
The IHT rates in Britain are high, but what about the rest of the world?
Japan’s highest rate of IHT is 55%, and revenue generated from taxing deceased estates generates 0.5% of their total GDP.
On the other hand, America is proposing to have no Inheritance Tax whatsoever, as many believe that the fruits of their labour have already been taxed. Australia, Canada, India and Norway no longer have IHT. Sweden abolished their death taxes in 2004.
In Britain, the tax levied by HMRC must be paid before the beneficiaries can receive their inheritance, and a large IHT bill can often be destructive, causing the closure of family companies, and forcing the sale of ancestral properties. Before the second world war, people in Britain were more likely to pay IHT than Income Tax.
But do we have to pay IHT, or are there ways around it?
The former Chancellor, Roy Jenkins (1967 to 1970), once famously said of Inheritance Tax that it is a “voluntary levy, paid by those who distrust their heirs more than they dislike the Inland Revenue”.
Here are 6 ways to reduce your IHT bill…
1. Make full use of the Nil-Rate-Band (NRB.):
If married, leave your assets to your spouse, as there is no tax payable. If both spouses make full use of the NRB, there is no tax payable on assets up to £650,000 in value (plus an additional £100,000 allowance per spouse for your main residence).
2. Give it away:
You can give away £3,000 worth of gifts each tax year. Gifts to individuals totaling £250 or less in any one tax year are exempt, with no limit on how many people you donate to. A gift of £5,000 from a parent to a child getting married is also exempt, as well as gifts of £2,500 from grandparents. Charities and political parties may also receive donations, which are then mostly exempt from IHT.
3. Set up a Trust:
Establishing a Trust is not as complicated as it seems, and is a service offered by most Life Companies. Discretionary Trusts empower the Trustees to make decisions, upon instruction, and can be free of IHT. Accumulation & Maintenance Trusts enable parents to leave assets for the benefit of their children, under the age of 25 years. Pension-Trusts, such as Q.N.U.P.S., are increasingly being used as a vehicle for one’s assets, before and during one’s retirement years.
4. Use your Home:
More often than not, the family home is the most valuable asset that one owns. By utilising an Equity Release Scheme (Home Reversion Scheme), capital from the house is freed up, and can then be spent or given away.
5. Get covered:
By establishing a Life Insurance Policy “in trust”, the pay out upon death is exempt for IHT purposes and is paid directly to one’s beneficiaries. By calculating one’s current IHT liability, and taking out a Life Policy to the value of this liability, the net return would then be a reduction in one’s overall loss of assets.
6. Spend it:
Why not ! Its your money, you’ve worked hard for it, so why not. SKI’ers are increasing, and the trend of Spending Kid’s Inheritance is on the rise. That around-the-world cruise that you’ve always wanted. Go for it. It can’t be taxed if it’s already spent.