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Avoid Inheritance Tax
Marlene Said:How can i avoid paying inheritance tax?
We Answered:If you receive a gift and the donor dies within seven years, inheritance tax is chargeable on the gift. However, if the gifts made by the donor in the seven years up to and including your gift are less than £300,000, no tax will be charged on the gifts.
The maximum rate of tax you could pay is 40%, but this would only apply if the donor had already made other gifts totalling £300,000. Also, the rate tapers down as the years go by, to 0% after seven years.
Some gifts are exempt from inheritance tax - e.g. if they fall within the annual exemption (£3,000 per donor per year), or are small gifts (£250 or less) or are habitual gifts made out of income rather than capital. In these cases, there is no tax even if the donor dies within seven years.
Lydia Said:Will Paul MCArtney pay 40% inheritance tax? How do the rich manage to avoid paying inheritance tax?
We Answered:Inheritance tax is charged on the taxable value of your estate, less debts that you owed, that exceeds £285,000. This does not apply if your estate passes to your spouse or legal partner. It also does not apply to assets that you have given away more than 7 years before your death. Small value gifts are also exempt.
Very rich people are able to dispose of much of their wealth without it affecting their lifestyle. This can be done directly or, more likely, by establishing Trusts. To work, it is necessary that the donor completely gives up all rights to the assets. This device means that the value of their estate on death has been reduced, possibly below the £285,000 threshold, and so no tax is paid on the value of these assets. Unfortunately for most of us we are not able to give up our assets and still afford to live. These days, most people are brought into the IHT regime through the value of their home so you cannot give that away.
Frances Said:Is there any way to avoid paying inheritance tax?
We Answered:Emasulated Britain: There is a difference between tax avoidance (legal), and tax evasion (illegal).
qpr26: I think you will need to consult a professional financial adviser/solicitor about this. If the house is made over to you now, there are still problems you may face. If the current owner dies within seven years, value of house may be added to estate for calculating Inheritance Tax. If he has to go into care, transfer would be disregarded if it is considered he has made a "gift with reservation". Current owner, if he still intends to live there, must pay you a market rent (on which you will be taxed) otherwise, again gift would be disregarded when calculating care fees or Inheritance Tax. If it is not your main residence, and you want to sell it, you would be liable for Capital Gains Tax if you make a profit. If you were ever to get divorced, you may have to sell house to give spouse half.
I have three properties (including main residence) I want to pass on to daughter, so I have created a trust passing houses to her on my death, and suggest current house owner looks at that option.
Bonnie Said:Legal way to avoid inheritance tax?
We Answered:Consult a financial adviser. A good one, not one of these fly-by-nights who set up. It will cost, but the result should be worth it. Maybe you could consider setting up a trust.
I can't think who the politician was, but someone said that paying Inheritance Tax is voluntary, there are always ways to avoid it. But you need the advice of a specialist, who will take your circumstances and assets into account.
Josephine Said:how many years in advance must my father put his home in my name so that I avoid paying inheritance tax in TX.
We Answered:Your Father should NOT put the house in your name at all. Unless his estate will be over $2 million this year or $3.5 million next year, there are NO Estate/Inheritance taxes. However, if he puts the house in your name as a gift, there WILL be gift taxes AND when you go to sell the house you will owe capital gains taxes on the difference between what HE bought it for and what you sell it for. If he leaves you the house in his will/trust then your basis cost in the house is stepped up to the value at his death.
For example if he bought the house for $25K, gives it to you (your basis cost is now the same as his $25K),he dies-the house is now worth $200K and you sell it for $200K then you OWE capital gains taxes on $175K. BUT if he bought the house for $25K, dies, leaves you the house that is now worth $200K you have a basis cost of $200K so you can sell it capital gains tax free.
Leon Said:do i need to be listed as a co-owner on a building with a parent to avoid inheritance tax?
We Answered:Being a co-owner will not avoid estate tax and you probably do not wish to operate in this way. You have several issue, liability, gift tax, and estate tax. You asked about estate tax so I will address that one first.
Estate tax is imposed on the value of all property owned at your death. There is a credit available which covers the tax on a portion of the estate. Currently the credit shelters $2Million from tax. It is currently scheduled to cover $3.5Million in 2009. Under the current rules the estate tax will abate in 2010 and there will be no estate tax owed. In 2011 the estate tax returns with a sheltered amount of $1Million. The current estate tax rate is 45% but it will be back to 55% in 2011. This percentage applies to any amount over the sheltered amount.
If the total estate is below the shelter amount then no estate tax will be due. Please note that this answer discusses only Federal Estate tax. Many state are 'coupled' to the Federal Estate tax and only take the available credit. If your state has de-coupled then you could still have potential for state estate tax.
If you inherit the property in any year other than 2010 then you receive a step-up in basis and will not incur tax on capital gain if you should sell the property at that value. In other words, if your parents bought the property for 100K and at death it is worth 500K then your new basis is the 500K and a sale at that price would not impose tax. If you keep the property for some time and it appreciates to 750K then you only recognize $250K in gain and pay tax on that amount. The only catch is that in 2010 you have no estate tax but do not get the benefit of the stepped-up basis so in our example you would recognize gain on anything over the original 100K less applicable depreciation. Obviously you'll need records for the original purchase and depreciation if death occurs in 2010. In other years you just need a good date of death appraisal.
If you become a co-owner then you have the issue of gift tax. If your parents give you part of the property then you become an owner and your parents may owe gift tax for the transfer. The current gift tax rate is the same as the estate tax rate (45% with a return to 55%). The giver pays the tax for any gift above the annual exclusion amount. Currently you can give up to $12,000 per year to as individuals as you like without incurring gift tax. If you give more then you must file a Form 709 and either pay the tax or use available credit. You can increase the $12K by giving joint gifts as husband and wife and thereby get to 24K and you can do the gifts every year to sort of spread out the gift. If you give over the exclusion amount then you do have lifetime gift tax credit available. You can give up to $1Million over your lifetime without paying gift tax if you file the 709 and take the credit. The catch is that it also counts against your estate tax credit so you need to plan carefully.
Gifting of the property may also uncap the assessment value and cause your property tax to raise significantly so make sure you check on local laws.
You have also have a liability issue. If the property is subject to a mortgage interest then transferring some to you may make the mortgage note immediately payable and this may not be a consequence you want. If you own the property with your parents then it may become property which one of your judgment creditors could seize and your parents could lose out. There are a couple of ways to own the property with your parents. You may be joint tenants or tenants-in-common. If you are joint tenants then your parents have lost all control because you need to sign off on any transaction. If you are a tenant-in-common then you can each sell your interest but it probably has far less value. Make certain that anything you do involves a competent real estate attorney.
By the way, the value issue can work both ways. Properly owned the value of the building for estate tax purposes may be far less than the fair market value on its own. These valuation issues need to be carefully addressed with a competent estate planning attorney working with a NACVA certified valuation but may present real options. You would want to have a discussion with the attorney regarding your goals and overall picture and then explore possibilities like carefully planned family limited liability companies, family limited partnerships, and other business entities which may help you meet all of your goals.
REMEMBER - GET COMPETENT LEGAL HELP. The issues are too great to enter into this sort of transaction without quality advisors.