Loopholes Exposed - 'How people avoid inheritance tax'

YOU don't need to be a millionaire or have secret accounts in Panama to cut down your inheritance tax bill - as the Prime Minister proved when his tax affairs were revealed over the weekend.

David Cameron has been accused of dodging tax after his mother gave him two £100,000 cash gifts after her husband died - because the move potentially saves the family from a stinging death tax bill later down the line.

Inheritance tax is levied at an extremely steep rate of 40 per cent, and an estate's value can be quickly eroded for beneficiaries by HMRC.

It's little surprise, rich families plan ahead to avoid paying. But it's not just the super wealthy who are liable for the tax. Many families could find they are worth more than they think, and still liable for tax - especially in light of fast rising house prices.

Under current rules, up to £325,000 of inheritance can be passed on to others without being taxed. After this inheritance tax is charged on most assets and cash - it means a tax bill of £70,000 on an estate of £500,000. More people have found they have been pulled into paying the 'death duty' - with average home values in London already above £500,000. An added £100,000 extension to the tax-free allowance, specifically for a family home, is set to take effect from 2017, rising to £175,000 by 2020.

If you bring down your estate's value to below the £325,000 threshold (or £650,000 for couples) you can easily avoid paying inheritance tax. And critics say this is what Mrs Cameron had in mind when she gifted David Cameron two gifts of £100,000.

The only proviso to using this method for tax avoidance is that you must live another seven years from the date of the gift, otherwise it becomes liable for inheritance duty. However, if you are in poor health, there are a few loopholes that allow you to get around the seven-year rule.

You can give as much money or assets to your spouse as you wish without incurring any tax before or upon death. And your partner can then add all of your £325,000 inheritance threshold to their own allowance, as long as it wasn't used upon the first death.

You also have a tax-free annual allowance of up to £3,000 to give cash or assets to anyone you want.

Unused exemptions from the previous tax year can be carried forward to the present tax year, but no further - so if you haven't never used the allowance you have £6,000 limit. On top of this, an unlimited number of gifts up to the value of £250 can also be made to any number of people.

Another option for parents and grandparents can make a one-off marriage cash or asset gifts to children of up to £5,000 or grandchildren of up to £2,500.

You can also give away your income - without any limits. If you don't want your beneficiaries to receive cash or assets yet, you can start the seven-year clock by making gifts to a trust and specify a payout date.

You could also consider using your pension which are not liable for any tax, as long as death is before the age of 75, points out Patrick Connolly, certified financial planner at Chase de Vere.

He said: "Unlike the assets in most other investment wrappers, there is now the possibility of passing pension wealth through the generations tax-free. "This means that pension funds can play a far more important role in effective tax planning.

"These death tax changes, coupled with pension funds not being liable to inheritance tax, will be an important consideration and for many people could mean that it is more tax efficient to draw income from other wrappers, such as savings accounts or ISAs, and to leave pension investments untouched."

If this all sounds a little fiddly - another option is taking out a life insurance policy, with the payout used to pay any inheritance tax allowing beneficiaries to receive the value of an estate in full.

However, it's important to make sure the policy written into trust so that the payout is tax free.

Source

www.express.co.uk