There are multiple reasons for giving early thought to succession of your private assets and putting in place arrangements using gifts, a will or a contract of inheritance. For many people, the most important reasons are to preserve family wealth for the long term and ensure financial security for their survivors. There may also be other motivators, such as the wish to avoid disputes, reduce claims to compulsory portions of the estate and, not least, to reduce or avoid tax burdens on the transfer of assets in the form of inheritance or gift tax. These taxes can be a significant burden on larger estates, and in extreme cases may necessitate the emergency sale of assets such as real estate.
The amount of tax payable on an inheritance or gift depends on several factors. Alongside the nature and value of the assets concerned, the degree of relationship between the heir or giftee and the testator also plays a significant role. Different tax-free allowances and tax rates apply to different relationships, and the amount of inheritance or gift tax payable varies accordingly. The tax-free allowances for inheritance tax and gift tax reduce the taxable value of assets bequeathed or gifted and thus decrease the tax burden on those assets.
In the case of an inheritance, an heir can use his or her tax-free allowance only once, when the succession actually occurs. There is a different rule for gift tax: use of these tax-free allowances can be repeated at ten-year intervals. Especially where significant sums are involved, it is possible to transfer assets gradually by way of gifts, with the recipients using their personal tax-free allowance multiple times to significantly reduce the tax burden or even avoid tax altogether. In addition to personal tax-free allowances, which are determined by degree of relationship, other tax exemptions are also available, e.g. for a family home that the recipient is living in, and for standard occasional gifts.
When drawing up your will or arranging a gift, you should ensure that you make optimum use of such reliefs and allowances to reduce the tax burden on your descendants and spouse or partner. To do this, it is advisable to seek qualified advice from a tax advisor.