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Making a will, ensures that specific intentions you have for the disposal of your assets after your death can be carried out. Many people wrongly assume that when they die their next-of-kin will automatically receive the whole of their estate. If you die without making a valid will you die "intestate". Should this occur, the laws of intestacy will apply to your estate and this could result in your affairs not being carried out as you would have wished.
You can avoid burdening your family with worries after your death of how your assets will be distributed by making your will and whilst we recognise that there is a large proportion of people who simply cannot give thought to the making of their will, this really is the only way you can ensure that your wishes are granted to your loved ones. It avoids any confusion about who gets what with family heirlooms and cuts out any disagreements which may arise after you have departed.
Inheritance Tax Reclaim
Thousands of British homeowners could be due an inheritance tax rebate, according to research from a financial service provider. An estimated 21,000 estates could be owed an average of £4,260 because the beneficiaries were not fully aware of how the probate system operates. With around £90 million overpaid by homeowners, how can you work out if you are due something back?
Inheritance tax is based on the value of a property when the owner dies. If it sells for less than the valuation within four years of death, the beneficiary is entitled to claim back some of the inheritance tax paid. It is a little-understood rule that seems to have left many out of pocket. Because of falling house prices in many parts of the UK, NFU Mutual believes thousands could be in this position. Prices have dipped by around 11 per cent in the last four years. Anyone who inherited property from June 2008 to February 2009 and June 2010 to August 2011 are the most likely to be in line for an inheritance tax rebate. Kerry Joan-Law comments: "Many people don't realise that they can claim back inheritance tax if the property they inherit sells for less than it was valued at during probate and with house prices generally falling in the last four years many people could still be able to claim back overpayments."
A study, which was based on a combination of inheritance tax data from HM Revenue and Customs and monthly house price data from Land Registry highlights that it is not just the person making a will who needs to understand the probate system.
Kerry Joan-Law at KJL Solicitors says "Inheritance planning is crucial in the run up to retirement. The inheritance tax threshold has been frozen at £325,000 until 2015, meaning that many people will potentially face a tax bill if they do not plan ahead,"
Whilst KJL Solicitors in Norwich point out that 21,000 estates could be due a refund of overpayment in inheritance tax paid on property it should also be remembered that the number of properties that have been valued over the inheritance tax threshold has almost doubled in the past five years. The average detached house in London, the South East and the South West is already worth more than £300,000. Because of this, even those who are short of cash or other assets, but have a home worth more than the inheritance tax limit, are struggling as they cannot dispose of their home to bring their wealth underneath the tax threshold.
There are several simple ways to avoid inheritance tax, for example,
Getting married is one of the best ways to reduce the bill. "Transfers to a spouse or civil partner fall outside of the inheritance tax net," says John Whiting of the Chartered Institute of Taxation (CIOT). Speaking to the Mail on Sunday, he explained how people can leave assets to a spouse or civil partner to limit their overall inheritance liability. Basically, leaving assets to a spouse means that they can then double their inheritance tax free limit from £325,000 to £650,000. Mr Whiting also suggests that it also pays to use cash and assets rather than give it all away. "A good tip is to spend some of it," he said. "But don't leave yourself destitute."
Other ways to reduce the bill include making gifts from an income, rather than capital, and giving gifts to people getting married, both of which are inheritance tax exempt, Norfolk Wealth Management can assist with advice on such matters.
Inheritance tax was always viewed as a death duty that only affected the seriously wealthy. But with the boom of property prices in the last decade, more and more ordinary families are being hit with paying inheritance tax of 40 per cent on any assets they inherit from their loved ones.
KJL Solicitors in Norfolk set out 7 steps to keeping down the inheritance tax bill of an estate.
1. Use the inheritance tax nil-rate band.
We can all leave up to £325,000 to friends or family free of inheritance tax, but sums above this are taxed at 40 per cent. This exemption allowance, called the 'nil-rate band', only relates to the amount of money you leave to your heirs; assets that are passed between spouses (or civil registered partners) are free of inheritance tax, regardless of what they are worth.
As of October 2007, Alistair Darling announced that married couples, and civil registered partners, can now inherit each other's unused element of the nil-rate band when one of the couple dies, giving them a joint nil-rate band of £650,000.
This means that they will be able to transfer their unused individual allowance to the surviving spouse. So when the first spouse dies, their share of the home and any other assets can be transferred simply to the spouse who is still alive. But when the second spouse dies, and if the first spouse didn't use their entire nil-rate band on death, inheritance tax will only be paid if the assets exceed the £650,000 threshold.
Unfortunately, this doesn't apply if you're living with your partner but you're not married, or if you're single. If you cohabit, you can both use your individual allowances of £325,000 (rising to £350,000 in 2010-11) and still be able to pass on £650,000 inheritance tax-free to your children. But you cannot leave assets which are worth more than £325,000 to each other without facing an inheritance tax bill. This could cause problems if one of you dies.
2. Make a will or check that your existing will is up to date.
If you don't have a will, you will die 'intestate' and the State decides who will inherit your money and assets. The rules in England & Wales are complex, but broadly speaking the bulk of your estate will go to your spouse (including a registered civil partner) or, if none, to your children (whether or not they are adults) and, if none, to other blood relatives.
The effect of the intestacy rules depends partly on the size of your estate. If your estate is large (currently more than £250,000 where there are children – even if they are adults – and £450,000 where there are none), less than you expect may go to your spouse. So it's always prudent to have a valid Will rather than rely on the intestacy rules.
By making a will you could, transfer some of your assets to children, grandchildren or others after your death within the nil-rate band, which would mean that these bequests were free of inheritance tax.
Note that it's important that you revise your will whenever your circumstances change; for example, when there is an addition to the family, your spouse dies or a divorce occurs.
3. Give your property away.
To save inheritance tax, you can use the following annual exemptions:
- You can give away up to £3,000 in each tax year, without being liable for inheritance tax, and the unused portion of the previous year's exemption can be carried forward. So couples who haven't made use of their allowances last year can give away £12,000 in total this year. But it can only be carried forward for one year.
- You can also give away £250 to any one person if the total gifts to that person don't exceed £250. This exemption can be used to cover Christmas and birthday gifts from grandparents to grandchildren.
- Wedding gifts are also exempt. Each parent can give to each child £5,000. A grandparent can give each grandchild £2,500 and anybody else can give the newlywed £1,000. But you must make the gift shortly before the marriage, as it only becomes exempt from inheritance tax when the marriage takes place.
So, if your daughter, for example, is getting married and you, and your spouse, want to give her money for a deposit on a house, you could give her £22,000 in one year. You can use both your allowances this year (£6,000) plus last year's (£6,000) plus two wedding gifts of £5,000 each.
4. Give away any surplus income.
If you have surplus income year on year, then you can give it away free of inheritance tax. But you need to be able to show that these gifts are part of your regular annual expenditure and that they don't reduce your standard of living. You can also use this exemption to pay life insurance premiums for the benefit of someone else.
It's advisable that you keep a record of these gifts and, if possible, a record of your net (after tax) income. This exemption can be very useful as there is no upper limit, so it's worth keeping the documentation.
5. Think of a potentially exempt transfer (PET)
Before you die you can give assets, cash or property away, but you have to survive for seven years after you have transferred them before they are free of inheritance tax.
After a period of three years, your beneficiary may get some tax relief and this can increase each year until the seven years has expired. But if the gift is worth less than the nil-rate band, the whole amount is added back into your estate when the taxman is calculating your inheritance tax liability.
You cannot get out of paying inheritance tax if you give away your home but continue to live in it rent free, as, under these circumstances, the taxman still considers it to be part of your estate. But you can give your home away to your child if they live with you, as long as they live in the property until you die or you go into a care home, and both of you must contribute to the running costs of the property.
6. Get business property relief.
Certain categories of business and business assets may qualify for 100 per cent exemption from inheritance tax after two years. The relief normally applies to a business or an interest in a business (partnership) or to shares in an unlisted company. Shares quoted on the Alternative Investment Market also qualify after you have held them for two years.
If you think that you qualify for such a relief, then it's best to obtain professional advice Norfolk Wealth Management can help.
7. Donate to charity.
Gifts to charities, political parties (providing that they have at least one MP and 150,000 votes), registered housing associations and gifts for national purposes are also exempt.
Reducing an inheritance tax liability is something that many people like the idea of, but relatively few actually make the effort to achieve.
The key is to think ahead when writing a will to determine how much, if any, inheritance tax is likely to be paid and how much it can be lowered by.
It is claimed more than £1 billion will be wasted this year due to poor financial planning and as much as 40p out of every pound can be taken by the Government on estates worth over the £325,000 threshold.
Money left to a spouse or partner is not liable for inheritance tax, even if it is over the £325,000 boundary.
In order to establish whether inheritance tax is due, the first step is always to value the estate.
KJL Solicitors can assist you with tax planning and in dealing with the estate following death.
Please refer to some useful guides on the Government website
Our solicitors undertake and execute:
- Living Wills
- Contested wills
- Succession claims
To ensure your needs are carried out efficiently and with humility please do not hesitate to contact us at KJL Solicitors, Blofield Chambers, The Street, Blofield, Norwich, NR13 4AA. Based just outside Norwich within minutes of the A47 and with parking right outside our offices.