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Inheritance Tax (IHT) – What it is and how to avoid it

In this article, we look at how contractors and freelancers can plan in advance to keep their assets safe from Inheritance Tax.

Inheritance Tax

What are the current IHT rules

The current IHT threshold is £325,000 – and will remain frozen at this level until 2015. Estates worth more than this amount are taxed at 40%. The effects of inflation will significantly increase the number of estates caught by the IHT threshold, which has remained unchanged since April 2009.

If you are married, or are in a civil partnership, you can take advantage of the joint threshold limit of £650,000 – so that the surviving partner’s estate will only be taxed if it is valued at more than the combined threshold.

If you are domiciled in the UK, all worldwide assets you leave behind are liable to UK taxation (generally speaking). However, Carol Cheesman, principle of Cheesmans Accountants warns that you need to be aware of double-taxation arrangements between other countries and the UK if you do own overseas assets.

It may come as a surprise that the UK does not have a double taxation treaty with either France or Spain, which could mean your estate is subject to IHT in two countries.

Avoiding IHT – Gifting

The easiest way to avoid IHT is to gift your estate to others while you are alive.

Under the current rules, you can gift £3000 p.a. to other individuals (such as your children). If you have not already done so, so you can use the previous year’s allowance as well as the current year’s one. These gifts are completely tax-free.

You can also provide a one-off gift of £5000 to your children, and £2500 to your grandchildren as wedding gifts. These gifts are completely tax-free.

You can also make gifts of up to £250 to as many individuals as you like each year, completely tax-free.

Gifts which fall outside the categories described above are known as Potentially Exempt Transfers (PET). Tax may be payable on PETs if you die within 7 years of making the payments, although taper relief reduces the amount of tax payable within this 7 year timeframe.

Avoiding IHT – Life Insurance

With up to 4% of all IHT raised coming from the proceeds of life insurance policies, you can avoid this trap by writing any new or existing policies into simple trust arrangements, so that they are not subject to IHT when your estate is assessed.

Further Information

IHT rules can become complex, and this guide provides a very high-level summary of the main rules. We recommend you consult an accountant if you have any questions.

Here are some useful online resources:

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