The leak of David Cameron’s finances in the ‘Panama Papers’ have brought the nation’s attention to inheritance tax.
The Prime Minister’s mother, Mary Cameron, gifted him two £100,000 payments following the death of his father in 2010.
The money was tax-free because it was given as a ‘lifetime gift’ by his living mother in May and July 2011. David’s mum’s estate would only be subject to inheritance tax on these gifts if she was to die within seven years of transferring the money to him.
The reason Downing Street gave for these payments from the Prime Minister’s mother was not to avoid tax but to even out inheritance payments to all her children following the death of her husband. David’s older brother inherited their family home, which is often the biggest asset in a person’s last will and testament.
This year it is likely that there will be more families paying inheritance tax than there has been for the last 35 years. This is because of rising house prices making more and more estates higher than £325,000 in value.
The current inheritance tax threshold is £325,000, which means that if you are set to inherit a property worth more than £325,000 it will be subject to inheritance tax.
There are several ways you can reduce the amount of tax that you have to pay on your death.
Mary Cameron has introduced us to one already: potentially exempt transfers. This is gifting money to your loved ones before you die. If you live for seven years after the gift is made, the ‘lifetime gift’ is not counted as a part of your estate and it is therefore not taxed.
Another way you can reduce the amount of tax you will have to pay on your death is to give money away. Each tax year you can give away £3,000 inheritance tax-free. This is known as a £3,000 annual exemption.
Finally, you can give to charity. Anything you leave to charity in your will is inheritance tax-free. Plus, if you leave 10 per cent or more of your estate to a registered charity then anything above the £325,000 threshold is taxed at 36 per cent rather than the usual 40 per cent.
James Beresford is the head of wills trusts tax and probate at Slater and Gordon.
Our team of specialist inheritance tax solicitors can help you to maximise the value of your estate were you to die by advising on how best to structure your will and plan for taxation. For advice in handling inheritance tax matters call us on freephone 0800 916 9056 or contact us online.