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Inheritance tax



Simply defined, inheritance tax is duty charged on all the possessions left behind after an individual passes taxable possessions including real estate, gifts given under seven years after the passing of the benefactor, certain types of trusts, and anything else of value belonging to an individual. The basic rate is 40% which is charged on the value of your possessions after the first 300,000 (this value is bound to increase due to inflation and the rise in the value of property). A basic example: Lets say a Mr. Taylor leaves an estate to the value of 320,000, there is no tax charged on the first 300,000, thereafter 40% is charged on the surplus 20,000 which gives us 8,000 worth in tax.

Fortunately inheritance tax is not charged on estate left by one spouse to another, but will be charged after the passing of the surviving spouse. This can be a tricky situation as the tax charged may work out to a greater value if the surviving spouse leaves a greater value than what she received, i.e. Mr. Taylor leaves his wife his estate to the value of 320,000, when Mrs. Taylor passes she has accumulated an additional 20,000 therefore the tax payable is 16,000 (it may not really matter to the deceased but it will definitely matter to the beneficiaries.)

A few methods to avoid the levy (and leaving a small fortune to the government) are:

a) Creating a trust where one can stipulate who should gain from it and under what circumstances.

b) Potentially exempt transfers also known as PET, are gifts which will be exempt from the tax only 7 years after they have been given, maintaining that the benefactor lives out the whole 7 years.

c) All contributions to charity are exempt from tax.

In light of the above it is therefore of utmost importance to draw up a will, this will allow for maximum effectiveness of your planning towards paying as little tax as possible.

The most obvious result of inheritance tax, is that it acts as a form of wealth distribution. Ideally we like to think that government uses the tax money to benefit the less fortunate and to improve infrastructure. In essence what happens is that the state takes its share of tax that you would assumingly pay anyway if you were alive and could continue spending your money.




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