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Many
people are oblivious to the fact that they could be
sitting on top of a potentially explosive, ticking
tax bomb that is continually being fuelled by rising
house prices. The tax in question is Inheritance Tax
(IHT), a non-discriminating tax that doesn't target
only the super-rich.
Prevention,
not cure
Let's
consider whether you have a potential problem. The
IHT threshold means that tax on assets valued up to
this amount is payable at a 'nil' rate. This includes
your property as well as your savings, investments,
insurance policies not written under trust and business
assets (subject to the availability of relief at 50%
or 100%). The value of your estate above this threshold
could be subject to a tax of 40 per cent, depending
on who inherits your estate following your death.
"25,000
estates paid £2.4 billion inheritance tax during 2002."
(Source: Inland Revenue 2003)
Protecting
your assets from the Taxman
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If
you haven't done so already, the first place to
start is to write a will. This will ensure that
your assets are distributed as you want them to
be when you die. Provisions to mitigate IHT can
also be included.
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Assets
transferred between spouses are exempt from IHT,
but other lifetime gifts could also be made in
a more tax-efficient way.
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Most
lifetime gifts are exempt from IHT if the
donor survives for seven years and there is no
limit on
the size of such transfers, so this is
an excellent way of transferring assets that you
do not need to keep in your estate. It may be
advisable to cover substantial gifts by insurance
against death within seven years.
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Trusts
enable you to transfer assets out of your estate
for IHT purposes, but enable trustees to exercise
some degree of control over the capital or income
(and you can be a trustee). There may be an IHT
charge on creation of the trust if it is a discretionary
trust, but this would be at 20%, and then only
if the transfer plus previous chargeable transfers
made in the preceding seven years exceeds
the 'nil' rate.
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Life
assurance policies should be arranged under trust,
so that the proceeds do not form part of your
estate on death for IHT purposes.
(article
date 03/2003)
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