To give or not to give? Inheritance and the Tax Implications
TheWeakest Link host Anne Robinson raised eyebrows when she announced her plans to give away her £50 million fortune. Her decision is in sharp contrast to that of many other celebrities like Daniel Craig, Simon Cowell and Gordon Ramsay who find inheritance quite ‘distasteful’. What motivated the 79-year-old to gift her wealth to her daughter and grandchildren? Interestingly, it is HMRC’s inheritance tax.
Inheritance, i.e., any form of assets passed on from one individual to another immediately before or after the person’s death, larger than £325,000 excluding to a spouse or civil partner attracts a 40% tax. Following demise, the inheritance is handed over to the HMRC which then transfers it to the inheritor upon paying the 40% tax. The tax needs to be paid within 6 months of the person’s death, otherwise interest gets levied. If the inheritor is unable to pay the 40% tax, there will be delays in distributing assets.
Though the general threshold is £325,000, there are some allowances. For instance, if the assets are left to the children or grandchildren, the threshold goes up to £500,000. Also, the married or civil partners inherit unused allowances i.e., someone can use their late partner’s allowance and leave assets up to £1 million for their children or grandchildren without any inheritance tax liability.
Until recently, inheritance tax was a concern only for Britain’s wealthy. However, with property prices booming, more families are coming under its purview. Currently, only 4% of deaths in the UK result in payment of inheritance tax, generating about £7.5 billion (0.3 per cent of the GDP); however, this is expected to double in a decade.
How can one bypass inheritance tax? One route is to follow Anne’s approach i.e., gift the wealth while alive as the tax is applicable only if the individual dies within 7 years of gifting. Planning early is crucial while following this approach i.e., it is not advisable as a last resort for someone who is already aged or diagnosed with a terminal illness. Although one can avoid inheritance tax by taking this route, it is also important to consider the other costs involved. For instance, capital gains tax will be applicable if assets are sold before distribution. Another way to avoid inheritance tax is to put savings in a pension. Pension funds are capped at £1 million and any money within this limit can be passed on without attracting inheritance tax. It is also possible to put money into your beneficiary’s pension, free from inheritance tax. Some parents also set up a trust in favour of the child and transfer assets to the trust. As the parents no longer own the assets, they are free from inheritance tax.
The inheritance tax is Britain’s most hated tax and there are strong sentiments for its withdrawal. As the future of inheritance tax remains unclear, it is better to evaluate one’s options and be prepared well in advance.