Wealthy seniors often overlook the obvious when trying to reduce their inheritance tax bills by hoarding their cash and investments.
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Sometimes, the best way to handle inheritance tax is to gift or spend the cash, say financial advisory firm Towry.
Without tax planning, a single person with an estate with a net worth of £1 million could face an inheritance tax bill of up to £270,000.
Instead of setting up complicated wills and trusts to manage the money, lifetime planning to give away the money in stages or simply just to spend and enjoy the cash, can save a huge amount of tax on death.
Drawing up a cash flow plan to give away or spend the cash can help wealthy individuals keep within gifting limits – technically termed ‘potential exempt transfers’ or PETS – of £3,000 a year.
Giving money away
More expensive gifts are allowed, after all it is the donor’s cash – but inheritance tax may be charged at a reducing rate if the person giving away the money or asset dies within seven years of making the gift.
For someone with finite assets and a fixed pension income, budgeting spending with a cash flow forecast is an informative financial exercise.
To calculate net worth, add up assets, like cash in the bank, investments, property, valuable possessions and life insurance. Next add up debts that need to be settled on death and take this figure from the asset value.
The result is the net worth, and while the first £325,000 is tax free, the balance is subject to inheritance tax at a rate of 40%.
Some assets, like life insurance may be held in trust, which places them outside the value of the estate and exempt from inheritance tax, so split assets into taxable and tax-free lists.
To reduce tax, concentrate of gifting or spending the assets over £325,000 that are subject to tax.
Watch out for tax traps – for instance appointing someone with a lasting power of attorney means the estate cannot make any further financial gifts once the owner is considered incapable of making decisions about their money through diminished responsibility.
Lastly, do not forget that making a will is the cornerstone of estate planning and provides the foundation for who-gets-what in the event of death. Wills are especially important for unmarried couples whose assets may not go to the people they want under intestacy laws.
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