2 REDUCING THE TAX BURDEN

The estate of every deceased person, whether they die having made a will or intestate, is subject to Inheritance Tax. This has replaced death or estate duties and the Capital Transfer Tax.

Two bands of taxation are applied to the value of the estate and these are set by the government. The bands for tax year 2000–2001 are:

• The first £234,000: nil-rated
• The residue: 40%

Thus if a man leaves an estate valued at £500,000, the tax payable will be 40% of £266,000, i.e. £106,400.

There are, however, legal and acceptable ways of reducing the total amount upon which tax is payable.

Property

Probably one‘s most valuable asset is the family home, be it a house, bungalow or flat. If when a person dies they are the sole owner of such property, the value of that property will be added to the total value of the estate for taxation. This could mean selling the home in order to meet the tax. However, if the property is held in joint tenancy, usually with one‘s spouse, the surviving spouse becomes the sole owner and it does not form part of the estate. Alternatively, the property could be held in tenancy in common with two or more named people. This means that each person owns an agreed percentage of the property. Thus when one of them dies, only the percentage that they own is valued for tax purposes. For example, if two people own a house as tenants in common with each having a 50% share and it is valued at £200,000, when one of them dies only their share of £100,000 becomes part of the estate. It is well worth making arrangements if you have not already done so.

Joint accounts

As with the joint tenancies, any bank or building society accounts held jointly become the property of the surviving account holders and so the amounts do not form part of the deceased person‘s estate.

Gifts

A popular method of reducing one‘s estate is by making gifts during one‘s lifetime. All gifts made seven years before death are exempt from tax. Unfortunately, we are not given a seven-year-warning of our impending demise. Gifts made less than seven years before death are taxed at 20% according to a sliding scale of years as follows:

Years	0–3	3–4	4–5	5–6	6–7
% of charge	100	80	60	40	20

If a gift of £5,000 was made in the fifth year before death, the tax would be 20% of £2,000 (which is 40% of £5,000) viz £400.

Exemptions

There are however a number of exemptions which apply and no tax is payable. These include:

• Unlimited amounts to your spouse.
• A total of £3,000 in any one tax year to any number of people.
• Small gifts up to £250 per person in any one tax year.
• Wedding gifts: maximum of £5,000 per child maximum £2,500 per grandchild maximum of £1,000 to other persons.
• Unlimited sums to registered charities.
• Unlimited sums to national heritage organisations.
• Unlimited sums to political parties although this is limited to £100,000 in the year before death.
• Business/agricultural relief at 100% or 50% depending upon the circumstances. It is important to take professional advice in such cases.

Taxable gifts can be left ‘free of tax’ which means that the tax is paid from the estate or ‘subject to tax’ in which case the recipient is liable for the tax. If this tax is not paid within 12 months, the deceased person‘s ‘personal representatives’, usually the executors, become liable which can be very embarrassing for all concerned.

Care needs to be taken when making gifts, for if it is considered that the donor is continuing to benefit from the gift, its value may be added to the estate. For example, if a man gifts his house to another person but continues to live there until he dies, the value of the house will be included for tax purposes.

If you have a valuable estate and wish to reduce the tax burden, then perhaps making specific gifts could be one answer.