Inheritance Tax
Planning The next Piece of the puzzle.

STEP 4

Where you are able to, make use of available EXEMPTIONS.

Exemptions are good. This is because they reduce the value of your estate at exactly the same time as you pass those assets out of your estate. This is not always the case. In certain circumstances a gift can pass legally to the recipient whilst the value of the gift remains in the donor's estate for Inheritance Tax purposes.

So Exemptions - there are half a dozen or so of them - should be taken advantage of wherever possible. But because they are 'good' there are limits on the size.

STEP 5

Consider removing assets (make gifts) in excess of the Exemptions.

But if you make a gift in excess of the Exemption limits, it could fall within the '7 year rule' and the 'Gift with Reservation rule'. The easy (and incorrect) description of these rules is frequently cited as, "live 7 years from the date of the gift and that gift will be outside your estate for Inheritance Tax purposes."

More correctly, you have to consider the 7 year period immediately prior to your death. Somewhat difficult because most people do not know that specific date (!).

In that period prior to death you must have enjoyed no benefit from the gift. If you have, the gift will be counted - for Inheritance Tax purposes - as having never left your estate.

The classic example is parents gifting their home to the children but continuing to live on the premises. It does not work so far as Inheritance Tax is concerned because of the Gift with Reservation rule.

Another example is giving the kids the villa in Spain and continuing to use it even if only a couple of times a year. It does not work unless you take further action.

next part coming to a blog near you soon.