Solicitors in Birmingham

What is Equity release ?

Equity release is a process of keeping use of the house or other item which has capital value, while also gaining a steady income, using the value of the house. It is normally offered to homeowners of 60 years of age or above.

One of the reasons to begin equity release is for retirees to use the money for whatever they need. This process allows for releasing the money without selling the property. However, some people chose equity release in order to decrease the amount of inheritance tax they would have to pay.

A person who needs equity release from the home gets a new loan that is calculated according to the value of the property. The loan comes as acash. However, sometimes the lender may give the extra funds as a lump sum, but this may decrease the value of the house as a result. Most conveyancing solicitors can deal with an equity release transaction.

Inheritance tax tips

Many grandparents worry about their children and grandchildren having to pay more tax than they should on their death because they have not conducted any type of proper tax planning.

If you have a very large estate then we do advise contacting a specialist advisor to try and assess the best tax saving strategy for your situation and see how much inheritance tax (IHT) you can save.

If your estate is of a more modest size then there are still things you can do to mitigate the amount of inheritance tax. Below we have outlined the most effective strategies to use if managing a medium estate size.

The main strategies are:

·               The current tax year (2010-2011) provides that the first £325,000 of a person’s estate is taxed at 0% (ie no IHT paid). Any amount above the £325,000 level will be taxed at 40%.

·               Those domiciled in the UK are liable to tax on transfers of value of their assets no matter where in the world they take place with limited restrictions. Keep in mind that moving overseas will not eliminate your domiciled status.

Transfers

There are three transfers of value which are liable to inheritance tax. These are: exempt transfers, potentially exempt transfers and chargeable lifetime transfers.

Transfers that are exempt for inheritance tax purposes are transfers between spouses, either during their lifetime or upon death but do not apply to common law partnerships.

Since around 2007 a surviving spouse is able to claim the unused portion of their spouse’s inheritance tax until their cap of £325,000 is reached.

It is possible to give gifts annually of £3,000 without being caught by inheritance tax requirements. You are also able to make an infinite number of small gifts being less than £250 each in order to avoid being taxed.

Gifts of £5,000 can be made to infirm or young dependents, as can gifts granted for marriages or civil partnerships by parents. If the person granting the gift is not a relative then a gift of £1,000 is permitted.

Potentially exempt transfers

If a gift is made and the donor of the gift survives for a minimum of seven years after the gift is made then they will not be liable to pay inheritance tax. Should the donor die within 3 and seven years after the gift is made the IHT will be reduced by reference to a tapering system.

Chargeable lifetime gifts

These gifts generally feature under discretionary trusts. The gift must not exceed the £325,000 limit before being tax but after this limit is passed only 20% taxation fees will be imposed.

Possible solutions

In order to mitigate the amount of IHT to be paid there are a number of strategies you could employ. A possibility is giving small amounts of money as gifts using the options mentioned above which enables the donor to give gifts while relying on their income.

Certain methods of investment are free from inheritance tax penalties. For example amounts invested in the alternative investment market (AIM) are exempt if held for a minimum of two years. This is ideal for those who want to have full control over their funds. In order to benefit from this investment however you are required to seek out specialist advice.

It is important to reflect on which strategy you think is most appropriate before implementation. Factors to consider are circumstances and objectives and looking for solutions which are practical, cost effective and realistic.