How can I reduce or avoid inheritance tax in the UK?

Legal tips to avoid inheritance tax

If you want to avoid that your heirs have to pay inheritance tax, you have to react even during your lifetime. A legal means of saving your heirs inheritance tax is to give your close family wealth during your lifetime. This can be real estate, but also money or other assets. look here for info on uk tax avoidance.

1. What are the allowances? 

With regard to the amount of the allowances, there is no difference as to whether the asset was inherited or donated. Spouses have a free allowance of 500,000 €. A child has an allowance of € 400,000 for each parent. In the relationship of grandparents to grandchildren, a free allowance of € 200,000 applies.

If, for example, parents want to transfer a property to a child during their lifetime, this may have a value of up to € 800,000. Up to this amount, the child does not have to pay gift tax. If the property had a value of € 900,000, only the excess € 100,000 would have to be taxed, which are above the free allowance.

The amount of allowances corresponds to the current legal status. The number of allowances may change over the years. 

2. How often can the allowance be used? 

With donations, the allowance can be exhausted every ten years. If a parent transfers an asset to a child in 2018, the child can fully benefit from the € 400,000 allowance in 2018. The parent may transfer another asset to this child in 2028, and the child may again take full advantage of the allowance, and so on.

Therefore, anyone who starts early in their lives to give away wealth to close relatives can succeed in making considerable donations over several decades without having to pay inheritance tax. 

3. Risk of bestowal

Anyone giving away something during their lifetime can usually no longer reclaim the gift from the recipient, with the exception of narrow exceptions. Therefore, you should consider carefully whether you want to pass on parts of your assets to third parties during your lifetime and may not be able to reclaim these gifts.

Special care is needed when parents transfer a property that they own to a child. With the entry of this child in the land register, this child is the owner and thus “master of the property”. If the child is ungrateful after the donation has been made, it could demand rent from the parents or even their departure from the property. Therefore, the donor should always secure a housing right and/or the usufruct under land registry law in transfers of real estate. Only then can the donor continue to use the property (for example, collect the rent) or continue to live for free in the property until the end of his life, even if he should throw up with the child at a later date.

Likewise, you can reserve in the donation contract, that the property falls back to you, the recipient should fall into financial collapse, so for example on his assets to open insolvency or foreclosure against him are operated, etc. In addition, you can also regulate the gifted person does not sell the property during her lifetime, ie, in particular, can not give away or sell it, and that in such cases the property falls back to you. If you retain such rights by contract, you can thus avoid that the property gets into the hands of creditors of the recipient or is deprived of the influence of your family. Furthermore, you can contractually stipulate that the property given away may only be charged with your consent.

4. Which formal requirements do I have to observe? 

If a property is transferred during his lifetime, this transfer transaction must be notarized without exception. In such a notarial contract the reciprocal rights and obligations of donors and recipients can then be regulated.

However, when transferring other assets, such as money or property (as long as it is not a real estate), you do not have to sign a notary contract, you can, but in certain cases, this will be advisable. In any case, however, you should document a donation in writing, by writing down the date of the gift, the gifted asset itself, the person of the recipient in writing and have this confirmed by all participants (donors and recipients) with place and date, and signature.

Worth knowing about inheritance tax

Anyone who inherits must inform the tax office. Because the Treasury can demand inheritance tax. But their amount depends on a few factors. Often it can be completely saved. But how?

After the death of a human, the survivors get their belongings. Inheritance tax is not always due. Important questions and answers about:

What is behind the inheritance tax?

What is behind the inheritance tax?

Inheritance is not a purely private matter in Germany. The legislator sets the rules – with the Inheritance Tax and Gift Tax Law (ErbStG). Inheritance is defined by lawyers as “acquisition of death”. Anyone who inherits as a legal heir or as a beneficiary by will has to pay inheritance tax on the inherited assets. This presupposes that the person concerned also accepts the inheritance.

“Tax law makes it irrelevant whether something is acquired through inheritance, through legacy, due to a right of a compulsory portion or by donation,” says Anton Steiner, a lawyer specializing in inheritance law in Munich. In a so-called donation to the death, for example, the deceased make a gift during his lifetime, from which the beneficiary only becomes the owner after his death. In the end, inheritance tax becomes due on the capital gain associated with the gift.

Are there any allowances?

Yes, regardless of whether it is an inheritance, a legacy, a compulsory portion or a gift. This means that taxes are due only when the amount exceeds a certain amount. “The tax exemption is higher, the closer the relationship is,” says Isabel Klocke of the Federal Taxpayers of Germany. Spouses can inherit up to 500,000 euros without having to pay inheritance tax. Children can receive € 400,000 tax-free – from each parent. Grandparents can give their grandchildren 200,000 euros, without access to the Treasury. Siblings, nieces, nephews and life companions are entitled to a deduction of 20,000 euros.

When is the inheritance tax due?

inheritance tax due

Whether inheritance, legacy, compulsory share case or donation: “The beneficiaries are obliged to report the assets they have received to the tax office,” explains the Bonn specialist lawyer for inheritance and tax law, Eberhard Rott. The heirs have three months from the day of their death. In many cases, the treasury is already informed about the registry office, the probate court or of banks and insurance companies. If the assets are above the respective allowance, then the tax office demands the submission of a declaration of inheritance tax. The tax is payable only on the date specified in the tax bill, says Rott.

How is the tax amount determined?

After deduction of the respective tax deduction the value of the inheritance must be taxed. Again, the tighter the relationship, the fewer taxes are due. There are three different tax classes. The most favorable tax rate is tax code one, which includes married couples and registered partners, parents, children, and their direct offspring. The decisive factor here is the amount of the taxable acquisition. That is the sum that remains after deduction of the respective allowance. If it is less than 75,000 euros, the lowest tax rate is one. That amounts to seven percent, explains Rott. This rate increases according to the respective asset size in seven stages up to 30 percent. “Such a tax rate will only be reached in tax class one if the assets exceed 26 million euros”,

Siblings, their children, children-in-law and parents as well as divorced partners belong to tax class two. Here, the lowest tax rate is 15 percent and increases to 43 percent. Tax code three includes all other people – these may be distant relatives, life companions or friends. The lowest tax rate is 30 percent and increases to 50 percent depending on the asset.

Which tax do peculiarities apply to real estate?

Which tax do peculiarities apply to real estate?

“Self-used homeownership remains tax-free under certain conditions,” says Steiner, who is also president of the German Forum for Inheritance Law. No inheritance tax is payable if the heir does not sell, lease or lease the estate for ten years – but lives in it. “However, this applies only in full to inheriting spouses or registered partners”, says Steiner. In the case of children and, in the case of their death, their children, the tax exemption will be limited to a floor space of 200 square meters. For other heirs, there is no tax exemption.

How can you save inheritance tax?

How can you save inheritance tax?

“Through donations during his lifetime,” says Rott. In contrast to inheritances, tax allowances can be exhausted every ten years for donations. If, for example, a mother has donated 400,000 euros to her son in 2008, he will not have to pay any taxes. Ten years later, in 2018, the mother can again give him 400,000 euros without incurring any taxes. The earlier someone begins to divide up their assets and pass them on to their offspring at ten-year intervals, the sooner he or she will ensure that they do not have to pay taxes. Rott: “This is particularly beneficial for very large assets.” Adoption or marriage can also help.