What is inheritance tax? - MoneyWeek Investment Tutorials

so in this video we're going to talk about inheritance tax now first thing to say is this is not a detailed guide to inheritance tax otherwise it will be several hours long inheritance tax is complex but I'm going to give you the bare bones and all the core principles then what I dared you to do is contact if your affairs are complicated a tax advisor or even try the website of the tax people which is www.h m r c-- dot gov dot uk' okay and I'll scribble that up at the end as well so inheritance tax basic principles coming up now you might think that dying would get you out of paying tax and obviously it does in one sense get you out of paying tax if I die tomorrow I'm not here writing any checks but unfortunately you do leave the potential tax liability on death to the people you leave behind so apologies for that this video combines two fairly grim topics tax and death for I would inheritance tax is definitely one to watch out for and the reason you need to watch out for it is because the best way to get around it as we'll see is to give stuff away try to find Harris that's been described as the tax on trust because we don't trust the rest of your family you're not going to give your assets away so when you die you're going to leave a big death estate and that's going to get clobbered for inheritance tax okay now first point confusion is this the inheritance tax is not the same as capital gains tax so don't get confused I'm explain what I mean there whilst basically I am still alive and let's hope yeah I'm making at least the end of this video we have two taxes that I might suffer one is income tax that's fine on my salary and any interest income and so on but the other is something called capital gains tax now that arises when I sell shares so second property is unfortunate enough to do that and that's a tax on the profit so the difference between the buying and the selling price there's a tax on income so that would be say rent from a property and there's a tax on the profit or you hope you make a profit from the difference between what you pay on what you sell it for now on death you become liable very completely separate tax called inheritance tax and boy is there scope for confusion between these two all right income tax most people don't get confused about that's pretty self-explanatory you can only earn income while you're alive and that is potentially taxed but over here there's confusion so in this video I'm focusing solely on this one right in another video I might focus on this one the point is this when I start saying things like you can give assets away like property for example and it could get you out of paying inheritance tax on death don't think I'm talking about this one because giving stuff away doesn't get you out of paying capital gains tax believe it or not but giving stuff away early enough can get you out of paying inheritance tax so first point up front please don't think I'm talking about this tax I'm talking about this one all right the rules are different so the tax on death so let's take a look at how it works now one sense it's brutally simple income tax is fiddly it's one over here you know you've got different rates different bans on my higher rate and my lower rate taxpayer on my own on taxpayer inheritance tax is pretty brutal because in very simple terms it works like this okay now first of all there's only one right basically not going to go into trusts in this videos only one rate of inheritance tax so what you do well I'll see if I die tomorrow hopefully I've left a will and that's a good planning point at the end this video so I've left a will so somebody perhaps a member of my family will act as my executor and that means they find my will so PR thawed it somewhere where they can find it and what they're gonna have to do is gather together a list of all my assets that's called my death estate I mean all my assets if I've got a property that's in the list that's got to be valued at market value or an estimate of market value you know my cash in the bank and he shares I own you can deduct outstanding debt potentially so you come up with this figure for Tim's death estate and that takes a bit of work actually and there are rules about how you go about that and how long you've got but you've got a debt estate and basically that will be valued and then hit for 40% and that's your inheritance tax alright and in simple terms there's only one way to reduce this bill basically and that is at the moment the first three hundred and twenty five thousand pounds of any death estate escapes so what I could do is get my death estate together for argument's sake I have a few hundred thousand pounds of death estate deduct the first three hundred and twenty five thousand pounds that's the exempt amount and the rest is hid for forty percent okay so the death of state was a million you take three hundred twenty five thousand pound off that would leave you with six hundred and seventy five thousand pounds and that will be clobbered at forty percent okay and that normally needs to be paid could be quite a large amount if you think about a wealthy family or a wealthy person dying that normally needs to be paid within six months at the end of the month of death all right all that you can apply it in um revenues pain installments over a longer period all right so it's a fairly brutal tax there is no lower rate as such but there's a big exemption so for a lot of people okay once they put their house and all their other assets in you know if you are leaving behind less than three hundred me five thousand pounds then your executor so that could be for example in my case my brother for argument's sake basically won't have to worry about inheritance tax but died with the death of state of more than three hundred thirty-five thousand pounds and there might be a problem okay so there's the basics Oh inheritance tax so a few questions first of all who pays it now again the rules are technical but one point worth making up front inheritance tax rests on you being on death what they call a UK domicile so the question of who and again I'm not going to go into all the detail on this in this video though that's a basic introductory video but inheritance tax is driven by your domicile now your domicile is your permanent legal home and all I'd say is if you're talking to a tax advisor or you're looking up some more on this domicile is not the same as your nationality necessarily it's also not the same as your residence the residence is a term that tends to dry if the income tax and capital gains tax rules domicile your permanent legal home is what drives inheritance tax and it's sticky the difference between residents and domicile in a nutshell is residence is relatively easy to change depending on where you're located but domicile isn't it's your permanent legal home so where you're born okay obviously influences that way your parents have spent most their lives obviously influences that as well all right so if they're British for example and they happen to have you on a day trip to France doesn't make you French for inheritance tax purposes if you start I mean so there are rules about what your domicile is when you're born and it's quite difficult to shake it off it's also quite hard to acquire UK domicile you can't just apply for overnight so bear that in mind who's liable for this tax the UK domiciles is the answer all right not the same answer as you would get if you were looking for example necessarily a capital gains tax or income tax so how can you get around this tax you know if you're going to leave behind a big death estate is there a way to reduce it all right now ideally of course you want to get it down to no more than that say three hundred twenty-five thousand because imagine if your death estate was three hundred five thousand you'd knock off the exemption and then your executor would write a check at some point for nothing okay because 40% of zero there's zero the point is how do you bring this down if your death estate is potentially let's say a million pounds lucky you how you gonna bring that down so that on the point where you die it's around twenty five thousand or even below three hundred twenty-five thousand okay well first of all if you're married I or you have a legally recognized partner so if you've got a civil partner I or a wife you can potentially double up about 325,000 you can make it as a couple six hundred fifty thousand here's how because the first basically let's call it exemption the first one is a gift to a spouse or civil partner all right now the effect of this is this if I were to die what I could do is leave all of my assets to my wife all right now there's no limit on that so I click so any assets in my name just pass straight to my wife now that means I haven't used my 325 thousand exemption I didn't need to because all gifts if you like on death to a wife everything I passes to a wife is exempt anyway so then when she dies Inland Revenue all say well actually Tim never got to use his 305,000 exemption and now his wife qualifies for her own 325 thousand exemption so between them they should be entitled to a six hundred and fifty thousand pound exemption and so whoever the executor is when my wife dies can make an application in that revenue to have the limit doubled if you like so whatever is left in my wife's name you can knock six hundred and fifty thousand pounds off at that point so that's quite useful so spouses can pass assets on death between themselves all right and that's that effectively then doubles up the amount you can exclude on based on that three hundred five thousand pound exemption or or free amount now the next one there are various ways of making gifts to other people all right so um death everything can pass to my wife and that's fine that's not problem what about other people other gifts okay and these potentially are other ways to minimize the tax and I won't run through every single one of them but I won't through one or two of the most common ones so for example gifts to political parties and registered charities and escape nor do I mean by that whatever what I mean is that the gift can be made by the person while they're still alive and if they were then to die okay or even if they don't make the gift when they're alive but leave a gift or political party in their will so the gift is that are made on death last possible moment if you like it escapes the death of state of the person who's died and therefore whoever the executor is that not to worry about paying 40% on it so that's how the gifts is ways you know giving stuff away certain political parties qualify there are rules so you can't just create a sort of Mickey Mouse political party you know run by your mate and give them everything in your will and expect that your death estate won't get taxed it's got to be a recognised political party and there are rules about those and a registered charity so if you're not for the National Trust qualifies that's the National Trust end up with quite a few properties on their books one imagines that one possible scenario is a very wealthy property owner dies suddenly the estate is faced with an inheritance tax bill of 40% the value of the property they're thinking we haven't got that kind of cash because don't forget you have to write the check in cash where we're going to find that kind of money 40% of several million the big family pie or how on earth we're gonna find that kind of money so yeah you think well okay well option one option would be to maybe gift come to a rating of the National Trust give the property of the National Trust maybe we can carry on living in one part of it maybe visitors can come around and so on and so forth and maybe we can minimize inheritance tax liability that way okay so a charitable arrangement like that might work now that won't apply to everybody's what else you can make gifts out of income okay while you're still alive now there are tests for this test basically about can I afford to do it as far as Inland Revenue's concern but for examples Tim Bennett I can make regular gifts out of income and provided the Inland Revenue are satisfied that the amount doesn't affect my lifestyle in short that I can afford it without sort of bankrupting myself okay or putting myself in poverty then they'll allow me to give away assets and if I were to then sort of die you know a few years after making these gifts those gifts would be considered outside my death estate for inheritance tax purposes and also that whoever got those gifts also wouldn't have to worry about them for inheritance tax at that point so regular gifts out of income then there's a three thousand exemption for an annual gift to any one person so I could say to my brother I'm gonna give you a three thousand pounds this year and if I were to drop dead a week after making that gift and three thousand pounds will be outside my death estate and wouldn't be taxable in his hands either for inheritance tax purposes can I could do it every year for ten years I can make much smaller gifts to anybody I like apart from saying my brother for up 250 pounds so that's the small gift exemption and you can do as many of those as you like that's useful for grandparents for example thinking about giving their grandchildren Christmas presents in cash okay lucky lucky grandchildren so basically the way that works is in addition to the three thousand an annual gift to say my brother the one person I can make 250 pound small gifts so I'll get my checkbook out my checkbook slightly old-fashioned 250 pounds to anybody I like as many times as I like as long as each recipient only gets 250 pounds the point of that rule really is to cover situations like birthdays and Christmas okay yeah you make a small gift of a hundred quid let's say to somebody for their 18th birthday you don't be immediately clobbered for inheritance tax if basically were then to drop dead the day the day later alright so small gifts escape too there are I'm got to the big one yet there are things like wedding gifts so parents can give their children five thousand pounds each grandparents can get two and a half thousand pounds and anybody else so your mates if you're lucky enough that they want to give you that kind of money can give you up to a thousand pounds and there are no inheritance tax consequences if the gift is a wedding gift okay um so bear in mind there are various ways of sneaking around with usual you're probably getting a feeling this is a little bit bitty in a way in banking guess what's fine that's not gonna happen every day 3,000 pounds well that's all right you can only do that once a year to one person 250 pounds small gift I suppose I could write loads a 200 pound checks but they're still not talking you know large amounts of money necessarily if you're running a sort of big potentially big death estate if you've got big assets I mean yeah political parts and charities well maybe I do want to do that maybe I don't so there is a big one missing and it's this all right there is a thing called a pet a potentially exempt transfer all right now I'm aware I haven't covered all the inheritance tax exemptions here but this is a biggie no limit on this so no 250 pound or 3,000 all right basically this says you can give any amount to cash for example could be an asset to anyone you like and inheritance tax rules and provided you survive believe it or not seven years after making the gift it escapes your death estate as the person who made the gift okay now where they got seven years from is quite an interesting question that's his money interesting question at all it's just a random rule of tax and there plenty of those about okay there have been moves to try and get it up to ten but it's stuck at seven it's a seven year rule and it is called the potentially exempt transfer because as that works supposing I was thinking right you know I'm not feeling brilliant today shooting this video so I don't reckon I've got this is tax for you I don't reckon I've got you know much more than about ten years left in me okay how am I going to reduce my death estate so that you know I don't basically leave my family with some horrible inheritance tax bill what I needs do potentially if I'm not gonna use the fact I can give it to my wife and so on if it's somebody else so I won't start getting assets away to other members my family brothers friends is look for the artists are making the gifts as soon as possible and the idea is so for example supposing I were to gift a some assets like so some shares or a property now if I survive at least seven years after making the gift then the property escapes my death estate is considered outside it and the recipient doesn't have to worry about inheritance tax at any point as far as my death estate is concerned like that but if I were to make the gift and there not survive seven years now obviously it's quite difficult to know where you can survive seven years or not that's tax for you if I were to make the gift and then survive for say three years then there is potentially an inheritance tax liability and I go through the exact calculation is on a kind of sliding scale on the gift but I made three years earlier I've got to survive the full seven and then believe it or not as soon as I do the inheritance tax liability on that gift Falls to zero and there's no limit on the amount it's not a maximum of three thousand pounds I can give away as much as I want whenever I want provided I survive at least seven years after doing so and that's called the potential transfer where potentially exempt because obviously until I survive seven years I don't know for sure whether I've made the gift in time all right and that's tax poor you could think as bizarre it is all right so that's a big tax planning point you're giving assets away now who you give them away to good question because you got to give them away properly you can't pretend all right the Inland Revenue a smarter than that yeah you can't sort of say come to an arrangement with a family member and say what can we sort of you know half-heartedly can I give something a label on it back ok like a property for example the MMU will test that and say well did you really make a bonafide a gift you know change the name on the title deeds of this property for example or were you kind of just pretending trying to have inheritance tax so there are you know ways they audit that but essentially giving assets away provided you you you want to give them away works well okay so families with lots of assets you the name of the game provided the other people at the top of the family trust the people the bottom is to start giving assets away if you think the death estate is going to be fairly sizable you know well over potentially two times two hundred twenty-five thousand pounds which will be exempt anyway all right so gonna finish off with one or two planning points that's a whirlwind tour of inheritance tax plenty of things little bits and pieces I didn't cover so let's just finish up those just the basic principles with while to admin planning points if you like stuff that sense of all to do okay I'm a big fan of sensible stuff so some obvious points when you're dealing with the heritage tax or thinking about it number one make a will everyone should have one there are surveys that suggest that only about 40% others do that's a little scary and the reason it's emptiness you want to know where your assets are going on death you know when I die I wanna know who's getting the assets there now if your obvious if you've got a spouse you know that by default you can simply the world could be very short it can just everything goes to my wife and after that it goes to my my child for example but the point if you don't make a will it could be a very simple document we don't make a will then the intestacy rules as they're called the law kicks in and so they ever pain okay you don't want to have to follow the statutory provisions in terms of where assets end up you want to just written the will and that then settles the issue of where assets go on death so okay my cost yet their money yet solicitor it's not a fault you get a well done first piece of advice okay you can you're going to leave a lot of stress behind if you don't basically number two is if you're going to end up with a big devastate now easy for me to say this you know if you think as a couple your death estates going to exceed when the second one of you dies six hundred fifty thousand pounds then start thinking valuing how are you going to give assets away and when the earlier you do it the better okay now this is a touchy topic because in some families you know for example people may not trust their children it may not want to give us its weight the children that's fine if you're going to do it early or as early as you can the cause of that seven year rule all right which will mean that if you haven't done it at least seven years before death potentially the asset doesn't escape parents taxol doesn't fully escape inheritance tax okay and the third thing is because this has been a whirlwind tour I'm just gonna put that website address up again okay Inland Revenue website much more user-friendly than it used to be a lot of people who work at the Inland Revenue they're not scary as they were once okay so they will talk you through all this stuff and there's McWhite good information there and my advice would be you know for the detail not a bad place to start HMRC gov dot uk' and or obviously a tax advisor particularly if you've got a reasonably large or complex death estate and that's inheritance tax

Channel: MoneyWeek

Views: 56,817

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Keywords: Investment, Inheritance Tax, Tutorial, tax, capital gains tax, money, death, pension, finance, moneyweek

Id: 3jynTDWoSBw

Length: 23min 33sec (1413 seconds)

Published: Fri Nov 04 2011