Are you still puzzling over investments in stocks, pension funds and the capital market and have overlooked financial planning for your dependents after you are no longer there to provide for them? Inheritance tax planning is a crucial component of your financial plan. It will decide what is left behind for your family members and dependents. While it may sound complex, it is very important to not avoid estate planning and to understand inheritance tax laws. This ensures that your loved ones can enjoy a large part of your hard-earned money and investments. What is Inheritance Tax Planning? Inheritance tax planning involves saving taxes on the estate after the death of an individual. Following the demise of an individual, the UK government makes a fair assessment of his estate. As per the legal definition of the term 'estate', it includes cash deposited, investment products, property and business in the name of the deceased person. If the estate's worth crosses the threshold set by the UK government, the beneficiaries have to pay inheritance tax. According to 2010-2011 data, the inheritance tax threshold is 325,000 at the time of death of the individual. Anything exceeding this limit is subject to a 40% tax. The threshold has traditionally changed every year. However, in the financial budget of 2010, the government approved the revision of the threshold limit once in four years. Why is Inheritance Tax Planning Essential? Effective inheritance tax planning can save thousands of pounds for your family. Consider the example of an individual having estate worth 500,000. According to the law, there is no tax on 325,000 and the remaining 175,000 is subject to a 40% tax. Calculating on these values, the beneficiaries of the individual has to pay approximately 70,000 in taxes. Paying such a huge amount as tax is a setback for even an affluent family. According to the government, inheritance tax is levied to eliminate the economic gap in the society. In the absence of proper inheritance tax laws, the rich will become richer and the poor will have no recourse to wealthy living. However, adversaries of this tax consider it as an example of bad governance. To this end, the government has provided some exemptions from the inheritance tax. Inheritance Tax Planning: Leveraging Exemptions Here are possible exemptions that an individual can incorporate in inheritance tax planning:
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