How to avoid Paying Inheritance Taxes Legally?
With an increasing tax burden in the UK, home owners are always seeking ways to avoid paying inheritance tax legally. There seems to be no way of getting away from it in the UK. If you own a UK house, you seem destined to pay inheritance tax (IHT) on the value of your house and any assets you own upon death. However, if you are a British expatriate, there is a way of avoiding paying inheritance tax legally.
What is Inheritance Tax and How Does it Affect Me?
However, a certain amount can be passed on tax-free, which is known as the ‘tax-free allowance’. This is also known as the ‘nil rate band’.
Inheritance Tax Rates
What is the Inheritance Tax Threshold?
The current inheritance tax threshold is £325,000. So, you would only pay tax above this amount. The tax is usually a fixed rate of 40% on the rest of the value. This is for 2010/2011 tax year and 2011/2012. Currently, this is not proposed to change until 2015, but with rising UK debt, expect the IHT threshold and IHT rates to increase over time.
However, if you are married, the IHT threshold amount can be passed on, so effectively you don’t pay tax on the first £650,000 if you have a British spouse as the amount can be passed on.
If your husband or wife is from overseas and is not a UK resident , the IHT threshold is £325,000 for the UK domicile and £55,000 for the overseas partner if they do not reside in the UK.
Can I reduce the amount of IHT I pay?
If the estate, including any assets held in trust and gifts made within seven years of death, is more than the threshold, IHT will be due at 40% on the amount over the nil rate band.
Reducing IHT through transfers to charity
From 6 April 2012 people who leave 10% or more of their net estate to charity can choose to pay a reduced rate of Inheritance Tax of 36%.
Reducing IHT through gifts to children
You can also reduce the amount of tax you pay through gifts within 7 years of death. You can give away your house as a ‘Potentially Exempt Transfer’. The beneficiaries could also possibly be hit with a higher rate of IHT if you die before 3 years. You get a sliding scale of IHT relief if you die between 3 and 7 years of making the gift.
Furthermore, if you are still living in the house after you have given it away, you have to be charged market rent to stay there.
For more info, visit HMRC’s site.
Avoiding Inheritance Tax Legally for British Expats
The best way to avoid IHT legally is to become a British expat. Then you have more options available to you. If you are a British expatriate and intend to stay offshore permanently, you can transfer your existing pension into a QROPS. This avoids 55% tax upon death which is imposed upon death if you have a private pension and are in drawdown. It also avoids UK income taxes of between 20% and 55%. So, not only do you avoid UK income taxes, but you also can pass your entire pension on when you die.
If you have a house in the UK, you can pass on the house as a gift over 7 years to your children or put it in trust. Then it would become free from IHT if you survive the 7 year period.
You can then rent the house out and receive an income. So, not only does the house get passed on to your children with no IHT, but you also receive a residual income and can use that money to rent a house and live in a sunny country such as Spain or Thailand with the peace of mind that if something happens to you, the whole lot gets passed on tax-free to your named beneficiaries, whoever that may be.
If you live somewhere such as Cyprus you also only pay 5% income tax per year or Malta (15%) or you could move to one of the tax-free countries such as some Middle Eastern countries or some of the countries in the Caribbean.
Avoiding Inheritance Tax by Moving Abroad
List of Countries with No Income Tax
Which countries have no income tax?
Andorra, The Bahamas, British Virgin Islands, Brunei, The Cook Islands (NZ), The Cayman Islands, Lichtenstein, Monaco, Oman, Qatar, UAE (Dubai), Vanuatu
If you have multiple properties in the UK, you can move them into a QNUPS to avoid UK taxes, although that part of your estate would now become part of your pension.
How about Canada as a tax haven?
I wouldn’t have considered Canada as a tax haven and most Canadians would agree. However, Canada lets you set up a 5 year immigrant trust which is tax free. This basically means that you can move to Canada and, provided you have money, investments or a business already in place, you can set up an immigrant trust and be tax free for 5 years (on all money other than earned in Canada). Because it takes 3 years to become a citizen you can actually get 5 years tax free and change nationality to Canadian, then leave before you get taxed. Once you leave, you remain Canadian but you are not taxable in Canada. Canadians get special treatment on living and working in USA. This is also an idea for US citizens to mitigate tax.
Do I have to Pay Inheritance Tax?
Inheritance tax needs to be paid on any cash or assets that are passed on when you die; this is usually paid from your estate. Basically, your estate is made up of everything you own, minus any debts due such as outstanding mortgages and expenses such as funeral costs.
However, if the tax is due on gifts you made during the last seven years before your death, the people who received the gifts must pay the tax due. This will depend on how long after the gifts are passed on that you die as mentioned above.
If the beneficiaries cannot or will not pay, the amount due then comes out of your estate. If you decide to move overseas, make sure you have health insurance to cover any bills if you get ill as well as pay for any repatriation of your body should you die as this could cost your relatives up to $10,000. Also, make sure that you have a proper Will written.
If you need further advice on inheritance tax and estate planning, please send enquiries to
email@example.comInheritance Tax: How to Avoid Inheritance Tax Legally by Richard Malpass