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The Facts About Inheritance Tax Planning

The Facts About Inheritance Tax Planning

There has recently been quite a media storm regarding the Inheritance Tax laws that can enable money to be gifted without resulting in a tax charge. The Prime Minister has been forced to speak out in defence of this commonly-used tax planning technique after media reports about his tax affairs seemed to criticise and raise questions of morality around his not being liable for tax on a £200,000 gift made to him by his mother.

But whatever critics may desire the UK's tax law is not governed by a "morality code", rather it is based on statute and it is structured so that all people, by following the rules, pay no more tax than they are legally obliged to.

In brief, Inheritance Tax is charged at a rate of 40% on estates valued over £325,000. Up to that amount is known as the ‘nil rate band’ and no Inheritance Tax is charged. An estate includes any property, possession, money, savings and investments that a person may have. Assets held in trust and even gifts you made when alive could all be liable for Inheritance Tax. The rate of Inheritance Tax can be reduced to 36% if 10% or more of the estate is left to charity.

But any gift made to an individual can be exempt from Inheritance Tax as long as the person making the gift lives for seven years after making it. Such gifts are known as “potentially exempt transfers” (or PETs). In the case of Mr Cameron, his tax return shows that he was gifted £200,000 by his mother using a PET, meaning that as long as his mother survives for 7 years after making the gift her son will not have to pay Inheritance Tax on that amount – a potential tax saving of £80,000.

So although several newspaper headlines have described Mr Cameron as ‘avoiding’ the £80,000 Inheritance Tax bill, financial experts have pointed out that the Prime Minister and his family have simply made use of one of a number of common and entirely lawful tax planning techniques which are available to all.

Significant changes to Inheritance Tax are due to take effect from April 2017 so if you would like advice or more information about Inheritance Tax Planning please contact Iain Robson on 01325 466461 or email iain-robson@close-thornton.co.uk

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