What is Inheritance Tax (IHT) ?
Inheritance Tax is the tax you pay in the UK on the estate (the property, money and possessions) of someone who has died. Inheritance Tax is complicated but in the most simplest of terms there is usually none to pay if,
- The estate is below the IHT threshold of £325,000
- You leave everything above £325,00 to your spouse, civil partner, charity or community sports club
- IHT rate above the threshold is 40%
However, there are many complications and similarly many ways to reduce your liabilities with careful Inheritance Tax planning. When you die any assets left to your spouse are exempt. Their IHT also rises by the amount of your allowance not used. This means a couple can actually leave £650,000 Inheritance Tax free. In addition there is the RNRB residence nil-rate band that allows you to leave your main home to a direct descendent, which is £175,000 or £300,000 for couples. Taking this into consideration means parents can pass on an estate to their children Inheritance Tax free up to £1million. You can see how it can get complicated very quickly so it is best to ask a professional to help you.
Careful estate planning can help you avoid Inheritance Tax.
This is the amount you pay nil-rate of Inheritance Tax on, or the amount below the threshold.
I’m Not Rich Enough To Pay IHT
More and more often people are getting caught in the Inheritance Tax trap because they assume their assets are worth no-where near that amount. Rises property prices throughout the UK can and has been catching people out. Often people also don’t take into account what they stand to inherit in the future as well as their own current assets.
Saving Your Wealth
1. Seven Year Threshold
Making gifts within your lifetime can reduce your estate size and it’s potential to exceed the threshold. IHT is not paid on gifts, irrespective of size, and if you live for seven years afterwards the gift it is exempt.
If you die before the seven years the beneficiary of the gift could be made to pay Inheritance Tax so this needs to be taken into account by your estate planner.
2. Gift £3,000 Per Year
The annual gift exemption allows you to gift away £3,000 per year Inheritance Tax free. There are no restrictions on who the gift can be to and it can be rolled over.
3. Give Away Extra Income
A very complicated exemption where you can gift any sum of money. It must come from a source of income and must be a regular payment that you give away, not a one-off sum.
4. Small Gifts
The unlimited small gifts allowance allows as many payments as you want up to £250 each year. They must however go to different people.
5. Pass On Your Pension
Your pension pot doesn’t count towards your estate so can be passed on free of Inheritance Tax. Money taken out does count towards your estate. If there is a lump sum to be paid out on death a beneficiary should be nominated to receive it. Pension transfers are scrutinised within 2 years of death.
Any life insurance policy that pays a lump sum on death should be written into trust otherwise it will be added to the estate. Trusts can also be used to move wealth to someone else but it is complicated as they are subject to tax and assets in trust no longer belong to you. Speak to our specialist estate planners who can advise the best use of trusts to protect your assets.
7. Make a Will and LPA
You should always make a Will, even if Inheritance Tax is not likely to be an issue for you. For more about the importance of Wills, click here. Don’t let anyone else make decisions about your finances without your consent. If you become incapacitated in your lifetime Lasting Powers of Attorney means your chosen attorney will make these decisions.
Our specialist advisors will do an Inheritance Tax calculation and work out if you are likely to go above the threshold. If so we can help put a plan in place for legally avoiding Inheritance Tax bills, you can potentially saved thousands of pounds. Its important to remember that regular regulatory changes can affect your estate planning so your circumstances and changes in regulation should always be reviewed.
If you have a large and complex estate the sooner you start to plan the better.
It makes sense to speak to one of our experts who can explain in simple terms, how to manage IHT planning and deal with it in the best interest for your family and loved ones.
Call us and have that discussion with us today.