An increasing number of Britons are getting around inheritance tax by handing assets to loved ones long before they die.
Some 46% of adults have received a 'pre-inheritance', according to a survey. In 1991 just 2% of the population had been handed significant amounts of money or assets by relatives before they died.
When asked approx. 45% of people say they expect to benefit from a traditional will, it was found.
Any cash handed down at least 7 years before the donor dies is exempt from death duty, which is currently 40% of any sum over a tax-free band of £325,000.
If a donor dies within 3 years of making a cash gift, any sum over that nil rate band is charged at the full 40%. Every year thereafter the tax is reduced by 20%. People are choosing to pass on cash to their family because it is exempt from capital gains tax.
Assets that could trigger a Capital Gains Tax (CGT) liability by being passed on in the family include 'movable property' such as jewellery, antiques or works of art worth more than £6,000, and second or holiday homes.
The practice of older generations giving away large chunks of their accumulated wealth has grown at a time when house prices have rocketed to record levels, creating millions of new taxable estates.
Life expectancies have also increased, meaning inheritances that individuals traditionally expected to help them on the property ladder or pay their own children's school fees are not always available when they need them most.
One in six of those alive today will live until they are 100, according to the Department for Work and Pensions. This includes 875,000 who have already reached 65.
ANOTHER WAY TO CUT YOUR INHERITANCE TAX BILL
A growing number of homeowners think they have an answer to escape Inheritance Tax.
Instead of planning to pay off their mortgage before they retire, some have decided to keep the debt instead in the hope of offsetting it against their inheritance tax (IHT ) bill when they die.
More than 1million people aged between 50-64 still have a mortgage, according to figures released from the Council of Mortgage Lenders and up to 66% of these plan to keep paying their mortgage debt “indefinitely”.
Inheritance tax is charged at 40% on all estates worth more than the threshold of £325,000, which includes your property. Any outstanding mortgage or other debts are deducted from the value of those assets and you only pay tax on the balance.
Rather than continuing to make capital repayments and pay down their mortgage debt, many switch to an interest-only mortgage instead as keeping their mortgage ensures their estate remains less than the Inheritance tax threshold homeowners can give money to children or grandchildren and avoid tax, provided they live for another 7 years.
This idea looks very attractive with base interest rates at record lows because older homeowners who need only a low loan-to-value (LTV) mortgage can borrow at rock-bottom rates of interest. Older people will be keen to seize on this opportunity to keep their family wealth out of the taxman’s hands. As keeping your mortgage will not save you tax if the money remains in your estate in a savings account, so instead you give it away as a gift.
A standard mortgage also gives you and your family more control over your property whilst you are living and after you die. Your family will still have to pay the outstanding mortgage after you die but they will have more freedom over how to repay the lender and selling the property.
If you live to old age you could have to repay the interest on your mortgage for several decades as the total interest payments could be substantial and wipe out the benefits if you live to be 90 or more. As also, not every lender will let you keep a mortgage when into retirement. As some lenders do not offer mortgages to people beyond the age of 75 which means you will have to repay it in full before then.
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