Reduce inheritance tax burden

By DAILY MAIL REPORTER
Updated:

 

The inheritance tax-free allowance is to be frozen at £325,000 for the next four years - potentially forcing thousands more estates into this pernicious tax.

Inheritance tax is charged at 40% on estates above the £325,000 tax-free band. Couples have a £650,000 allowance between them.

Relatively few estates - about 15,000 a year - pay the tax. But for those that do, bills can be huge.

The Government is expected to make £2.4bn from IHT in this tax year. And with the band held at £325,000 until 2014/15, coupled with rising share and property prices, the tax take is expected to rise by £70m in the coming year and by £170m in 2011/12.

But there are things you can do to make sure your friends and relatives inherit as much of your cash as possible.

Nicola Roberts of accountants Deloitte said: 'There are a number of measures you can take --and the sooner you start, the

better.' Your estate, for inheritance tax purposes, is everything you own at the time of your death.

So that includes your home and its contents, investments and personal possessions, minus everything you owe (including funeral expenses). Particularly in the South East, high property prices mean that many will easily slip into the IHT net unless they do some planning.

You can give as much as you like away and it will escape IHT if you survive for seven years after making the gift. There is one proviso - you must not retain any interest in the gift.

For example, you can't give away your house and still live in it rent-free. Such gifts are called Potentially Exempt Transfers. If you die between three and seven years of making the gift, then if tax is due, the amount paid is reduced.

So, if you die six years after making it, you'll pay a fifth.

Some gifts are free whenever you make them. A parent can give up to £5,000 as a wedding gift to their child, or £2,500 if you're a grandparent or £1,000 for any other relative or friend.

You can also give any number of small gifts up to a maximum of £250 and there is an annual exemption of £3,000. You can't add the small gifts on to others.

But you can combine the wedding gifts with your annual exemption - so a parent could give their child £8,000.

Alimony payments are outside the estate, as are gifts out of normal expenditure (say, for example, regular monthly payments to children at university).

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