The politics of inheritance tax
THE politics of inheritance tax have been talked about for years and as we discussed recently David Cameron has been looked at for some gifts.
A gift of £200,000 from his mother (this will be exempt if his mother lives the seven years for a potentially exempt transfer) and an inheritance of £300,000 from his father's estate.
The issues raised here are not new. The ethics of paying tax on money that tax has already been paid on is not the same as tax evasion of companies who don't want to pay tax at source; but the lines are being blurred by the media and matters are lumped in for headline grabbing and stories.
The morals of inheritance tax are possibly the rich stay rich if you don't have a system because they pass it on to their children. With an Inheritance tax system you actually take a portion of this and a government can redistribute it for the benefit of the people of that state.
Whichever side of the argument you support possibly depends on a number of things but predominantly whether you have to pay it or whether you receive it.
This is perhaps a moral consideration for you personally but as independent financial advisers we have to work with the system in place for the benefit of our clients to reduce the impact.
Tax mitigation and not evasion is completely legal and with increasing house prices many people who would not have paid inheritance tax will now do so. We spoke briefly about the main residence benefit announced by the chancellor recently and here is some more detail.
In the Budget the Government introduced that homes up to one million pounds will be free of inheritance tax if you are a couple; or £500,000 if you're single. This applies to main residences left by grand-parents and parents to children, stepchildren or grandchildren. This will be phased in from 2017 to 2020.
OK, now the detail: Every person has what's called a Nil Rate Band (NRB) of £325,000 which can be passed on from your estate that does not attract any inheritance tax. This is the total value of your assets and not just your main residence. Anything over that and you will be charged 40 per cent tax, which has to be paid to the state.
From 2017 there will be a new tax-free main residence band which will be implemented and only if gifted to children, stepchildren or grandchildren.
From 2017 it will sit at £100,000 and will go up each year by £25,000 to a maximum of £175,000. So, in 2017 therefore you have your NRB of £325,000 plus a £100,000, which makes a maximum of £425,000 for a single person and £850,000 for married, or Civil Partnership couples. This increases to one million pounds by 2020 for couples and £500,000 for singles.
So, without the main residence allowance a house worth £650,000 can be left free of inheritance tax for couples and £325,000 for singles.
The couple's limit is worked out on the basis that when one partner dies they pass on all the allowances to the existing partner and the NRB and allowance remains unused.
With properties that are worth more than two million pounds you lose £1 of main residence allowance for every £2 in value above two million pounds.
Inheritance Tax Planning can be complex but worthwhile in the long run if you want to benefit your relations, friends and charities.
A little more detail on gifts .You can gift £3000 each year free from inheritance tax. The writer's wife receives a pension payment each year from her father and has done for many years. You can also give £250 to everyone you know.
If you gift to charities or political parties these are also free from inheritance tax.
You can give £250 each year to everyone you know but no more. This does not count towards the annual gift allowance of £3000. So, money for a birthday present could be taken off your estate value.
You can gift money from your income (not assets) if it does not affect your lifestyle, the money that you give is then exempt. Gifts of money for weddings are exempt; £5000 from a parent, £2500 from a grandparent and £1000 for anyone else. You have to give it before the wedding or civil partnership and the couple actually has to complete the ceremony.
A gift means that there is no reservation attached to it. It is given freely. You can't give your house to someone and then have a consideration that you live in it until you die. That's a gift with reservation. It won't work and there are some complex issues with taxation as it may turn out to be a potentially exempt transfer. If you do not survive the seven years required there is then further tax complexity or a chargeable lifetime transfer.
:: Darren McKeever (dmckeever@ wwfp.net) is Northern Ireland adviser of Worldwide Financial Planning, which is authorised and regulated by the Financial Services Authority. For a free, no obligation initial chat about your individual finances, call 028 68632692, e-mail email@example.com or click on www. wwfp.net. Follow us on Twitter: @WorldwideFP