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Don’t Leave Your Money to the Taxman!

At the moment you can leave as an individual £325,000 free of inheritance tax – 650,000 as a married couple. From 6 April 2007 new allowance is being introduced which is often referred to as the main residence allowance. Initially the allowance will be limited to the first £100,000 of equity in your home, but will increase by 25,000 a year and by 2020 it will be worth £175,000 – or £250,000 as a couple.

This means that by 2020 married couples will be able to leave the first £1 million of their assets free of inheritance tax – provided they follow the following rules:

  • You will only qualify for this extra allowance and relief in respective your home if you leave the money to your children which includes stepchildren adopted or foster children and your grandchildren. If you want to leave the money to a brother or sister or niece and nephew the extra allowance will not be added on.
  • You cannot use the allowance to avoid inheritance tax on buy to let property – it only applies to the home you live in as your permanent residence.
  • If you, or perhaps in this context your parents move out of their home into residential care they can still claim the main residence relief.

Whilst million pounds on the face of it appears to be a reasonable amount of money with increasing property prices added onto savings very often people exceed this limit and fall into the trap of paying inheritance tax, as anything over the applicable tax would is taxed at 40%. If you leave more than 10% of your estate to charity then the rate is reduced to 36%.

Under the new rules, for those with estates over £2 million, and you take the system will cut the tax break by compound every 2 pounds it is worth over 2 million not get any further tax relief.

What about single people?

Unfortunately Taxman doesn’t do any favours to single people, and what a lot of people who live together as cohabitees do not realise is that they are not entitled to the tax advantages detailed above which apply to married couples, regardless of how long they have lived together. They are treated as single people. Single people will only qualify this sting 325,000 tax-free allowance plus the 100,000 from this April increasing by £25,000 a year to 2020

if you are in a long-term relationship it is tax advantageous to get married because married couples can leave their entire estate to their spouse free of inheritance tax. Inheritance taxes then only paid when the second spouse passes away.

Tactics to avoid inheritance tax

If you can reduce your estate to force a or £1 million as a married couple there will be no tax to pay for 2020.

It may be appropriate in your family circumstances to pass on some of the equity release from your home before you die Ansell and so long as you survive seven years the wealthy pass on should escape inheritance tax, but it’s important to keep the paperwork.

Consider what assets you could keep outside of your estate. For example investments with life insurance can be written in trust. This will ensure that when they pay out it goes directly to your heirs rather than been included in your estate tax purposes. The added benefit is that your heirs could receive the money more quickly and could then use it, if necessary to pay off any inheritance tax liability.

The seven-year rule

Anything you give away escapes inheritance tax seven years after you’ve disposed of it, but you must give it away without retaining an interest in it, so you cannot put your home in your children’s name and continue to live in it and then claim that it is no longer part of your estate

The most important thing to consider is seeking legal advice, and at the very least making a will.


Please feel free to contact us for a free no obligation discussion of your circumstances and advice as how to plan for your families future.





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