Consumer heavyweight Len Dastard’s guide to Wills – Part 3

16 March 2011

Get back, you insufferable hijo de puta! Oh, it is only you, the avid Bitterwallet reader. My apologies, but I was expecting my arch-nemesis Che Sangre, the Devil of Death. I am Len Dastard, a real-life litigation executive disguised as a retired masked Mexican wrestler to keep my true identity a secret.

I remember the Saltillo Stand-off in ‘78, Che Sangre. Strike at your peril, you beast.

You may remember my previous two pieces on Wills. Once again you can relive those earth-shattering occasions right here and here.

This is the last installment in what critics are already calling an epic trilogy - Inheritance Tax and How to Limit your Tax with Thoughtful Planning.

OR ITAHTLYTWTP, for short.

Inheritance Tax

Inheritance Tax is tax payable on the transfer of assets either during an individual’s lifetime or on his or her death.

Current UK legislation allows for the first £325,000 of your estate to be free from Inheritance Tax. This might sound considerable but when you start adding up the value of your house, savings etc you may be surprised by how much you are actually worth.

If you are a widow/widower at the time of your death then this allowance may perhaps be increased to as much as twice this figure - £650,000. That bastardo taxman will take 40% of everything you leave over the current limit of £325,000 (or £650,000 as a couple).

Tax Allowances

Spouse Exemption – there is no Inheritance Tax on transfers (gifts), whatever the value, between married couples or civil partners.

Annual Exemption – there is no limit to the size of gifts that may be made, but if having made a gift you die within seven years, the value of the gift falls into tax. The exemption is that everyone can give away up to £3,000 per tax year. Couples can therefore give away £6,000.

Marriage Gifts Exemption – parents can make wedding gifts of up to £5,000 to each of their children. Other relatives (grandparents etc) can make gifts of up to £2,500 each to marrying grandchildren. You are also able to give up to £1,000 as a wedding gift to anyone else but this must be made before the wedding day and not after.

Small Gift Exemption – you can make any number of gifts to different people up to £250 each in any tax year.

Other Gift Exemptions – you are able to make any number of gifts of any amount out of your surplus income.

Potentially Exemption Transfers (PET)

In most cases any gift larger than the exempt gift allowances is a Potentially Exempt Transfer (PET). PETs can be given to another person directly or as an investment for them. This person must need to live at least 7 years from the date that the transfer is made for this gift to fall outside of the estate and therefore avoid tax.

Gifts over the £325,000 have their Inheritance Tax gradually reduced the longer the time after the gift was made. This is known as Taper Relief.

Potentially Exemption Transfers (PET)

In most cases any gift larger than the exempt gift allowances is a Potentially Exempt Transfer (PET). PETs can be given to another person directly or as an investment for them. This person must need to live at least 7 years from the date that the transfer is made for this gift to fall outside of the estate and therefore avoid tax.

Gifts over the £325,000 have their Inheritance Tax gradually reduced the longer the time after the gift was made. This is known as Taper Relief:

Period of Years before death                % reduction

0 – 3 years                                                NIL
3 – 4 years                                                20%
4 – 5 years                                                40%
5 – 6 years                                                60%
6 – 7 years                                                80%
7 years +                                                   No tax

These are not the only tax implications when it comes to dealing with Wills and Estates so it would be advisable to instruct a financial adviser if it is proportionate to do. Law firms tend not to offer comprehensive tax advice.

That, amigos, is the end of our guide to Wills. Did you enjoy it? My jalapeño headlock says that you did. If you have any issues that you would like me to tackle then please contact me at [email protected]

TOPICS:   Economy   Tax

4 comments

  • scrooge
    great article. question is, how does the taxman know what gifts etc have been given? if someone dies, how can the taxman tell what gifts/money/etc the person has given away in the last 7 years, and to whom, and who and how is chased to pay the tax on those gifts if over the limits?
  • Len D.
    Hi Scrooge - usually it is done on trust. It is worth remembering who you gave these gifts to in order to prove to the taxman if he comes knocking that they did not exceed the limit. It is important to note that these gifts need to be made to DIFFERENT people. When you die there are many forms that need to be completed in order to declare to the taxman what gifts were made. These forms are usually prefixed with IHT. The transfers and gifts form is IHT403 and the actual return is named IHT400 if there is inheritance tax payable. Hope that answers your question!
  • The B.
    Just give gifts in cash or from a joint account (if you've got one), my old man died unexpectedly and gave me a cash gift of £5k 2 weeks before he did so, did we declare it? Why of course we did, we're law abiding citizens, the idea of tax evasion never crossed our mind. Let look at all that lovely tax shall we? Your parent goes out to work and gets charged, let's call it 24% tax on their earnings, they decide to buy a car for example with their hard earned money, paying 20% of the value in VAT, they then gift you the car which is worth £10k and are sadly struck by a bus, you are now liable to pay tax on 70% of that car at 40%. How much in real terms does it mean that the government has fleeced out of that his initial salary?
  • When B.
    [...] compadre Len Dastard’s final piece on Wills last week, he mentioned the existence of the transferable nil rate band for inheritance tax [...]

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