Q: My wife and I would like to make arrangements to pass our estate to our daughter when we die. I am wondering what we can legitimately do while still alive to reduce any inheritance tax (IHT) that may be payable?
GM, North Queensferry
A: You have not given me any indication of the value of your joint estate or whether you and your wife have a will in place, so here are some general considerations to mitigate any potential IHT liability.
The first £325,000 of your estate is taxed at 0 per cent – this is the nil rate band (NRB). If the value of your estate is below this level there will be no IHT to pay. Any unused NRB is transferrable on death between spouses. If you leave your assets to each other on death and the combined value of the survivors estate, when they die, is less than £650,000, no IHT will be payable.
Gifts between spouses (domiciled in the UK) are not subject to IHT on death. However, this usually means that the estate of the surviving spouse is more likely to be liable for IHT when they die.
If your estate exceeds these amounts, then the balance is subject to IHT at 40 per cent. However, there are things you can do to reduce or limit the potential IHT liability:
Use your small gift exemptions, which are:
Annual exemption of £3,000. This is available to everyone and can be carried forward for one year, if not used.
Small gifts of up to £250 can be made to any person.
You can gift up to £5,000 to your children on their marriage (£2,500 to grandchildren and £1,000 to others).
Gifting out of income – Potentially Exempt Transfers (PETs)
If you make larger gifts whilst you are alive, these potentially reduce your estate for IHT purposes. A gift that meets the PET requirements will not normally be assessable to IHT provided the person making the gift survives for seven years after making the gift.
If you want to make a gift to your daughter but do not want her to have access to the capital until she is older, or if you want access to some of the funds, a trust can be used to potentially remove assets from your estate while still giving you some control of the assets.
Investments & life assurance
Investments in shares listed on the Alternative Investment Market (AIM) are exempt from IHT after two years.
If you do not want to do any of the above but would like to make some provision for the payment of IHT, you could effect a whole-of-life insurance policy. As you are married, this should be arranged on a joint life second death basis. The sum assured will be your estimated IHT liability and is payable on the death of the survivor.
• Alan Reid is a partner at Cornerstone Asset Management LLP.
If you have a question you need answered, write to Jeff Salway, ℅The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: firstname.lastname@example.org. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice.
No action should be taken in reliance of the information given. The Scotsman Publications Ltd and Cornerstone Asset Management LLP accept no liability on the basis of this article.
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