HMRC have just released details of how much inheritance tax (IHT) they have taken from the estates of deceased UK individuals and the total last year soared by 22%, to an all-time record level of £4.6 billion (Financial Planner).
Since 2009-10, the amount taken in IHT has increased on average by 12% each year and is now at the highest level since IHT was introduced in 1986.
A lot of this increase is due not only to house prices (8.4% last year, according to the Halifax House Price Index), but also to the fact that the amount someone can leave without IHT being payable has been unchanged since 2009 – and will continue to be frozen until 2021 (Financial Planner).
Facts about IHT
• It is payable when someone dies and they leave their assets (their ‘estate’) to someone other than their spouse or registered civil partner.
• The first £325,000 of their estate is taxed at 0%.
• If they had a spouse or registered civil partner die before them, their £325,000 might also be carried forward so the first £650,000 of the estate when the survivor dies would be taxed at 0%.
• Above those thresholds, everything is taxed at 40% (or 36% if you leave substantial amounts to charity).
• For example, a widow leaving £1 million could have £140,000 taken from her estate to pay IHT (based on a £650,000 threshold).
• From April 2017, the 0% IHT band could be increased if you have a residential property.
• The rules about IHT and how to avoid it are complicated; please ask for guidance on how inheritance tax will affect you and your family.
Inheritance tax: what can you do about it?
IHT is affecting more and more families nowadays and I’m often asked what can be done to avoid the taxman receiving thousands of pounds, rather than the family (Financial Planner).
There are several things you can do to reduce the impact of IHT and here is a list of some of them.
By its very nature, it is simply a brief overview, so make sure you understand what is involved before you take any action. Let me know if you need further explanation.
1. Make a will
Who you leave your estate to makes a major difference in the IHT bill. (An ‘estate’ is all your worldly wealth.) For example, anything you leave to a spouse or registered civil partner is free from IHT.
So a professionally drafted will is the first step in your estate planning.
2. Use your gift allowances
Each year, you can give away up to £3,000 free of IHT, but there are also other allowances that you can use too – such as when someone gets married. Making sure that you use your allowances can reduce tax liabilities, because it reduces the size of your estate (Financial Planner).
3. Give away your surplus income
Do you get a regular income, such as a pension, and find that you don’t spend it all? If so, you can give away more than the £3,000 each year (free from IHT) because a regular gift of ‘surplus income’ is exempt from IHT.
4. Put money into your pension plan
If you have a pension fund and die before the age of 75, the death benefit can be paid to your heirs free of IHT and free of income tax.
So a fringe benefit of funding for your retirement could be that you also protect the fund from IHT.
5. Make gifts to charities
Any money that you give to charities, during your lifetime and through your will, is exempt from IHT.
In addition, lifetime gifts can usually be enhanced by Gift Aid and a large amount of charitable legacies could mean the rest of your estate qualifies for a reduced 36% rate of IHT (from 40%).
6. Qualify for business property relief /agricultural property relief
If you run a business or own a farm, that asset could qualify for 100% relief from IHT, depending on the circumstances (Financial Planner).
You could also buy certain small company shares or business interest as an investment or through your ISA and get the 100% relief – but this is a specialist area and needs careful consideration beforehand.
7. Put money in trust
Making gifts of substantial amounts can reduce your estate and the IHT bill, but to qualify you have to live for a further seven years.
You can just simply give the money away to the family, of course, but do you trust them not to simply spend it all straight away? That’s why many people gift money to trusts, a legal arrangement of ownership, rather than just hand the money over.
You can also put money into certain trusts that will allow you to receive regular payments from the trust fund, if you need that.
8. Take out life insurance
If you do not want to give money away, or put it in trust, then you could consider taking out a life assurance policy and putting in trust.
When the policy pays out on your death, the proceeds can then be used to mitigate the tax bill.
This doesn’t actually save any IHT of course, it simply means that you will pay a regular monthly or yearly amount to an insurance company and an amount equal to the tax due on your estate can pass in its entirety to your heirs.
9. Ask for advice!
Estate planning is a complex area and doing the wrong thing could be costly. Make sure you contact a professional adviser before you sign anything or part with any money. And of course, I’m more than happy to guide you in estate planning!
Financial Planning Bristol
If you would like to speak with one of our Independent Financial Advisors and potentially receive financial advice, please contact us on 0117 923 7652. We are based in Clifton, Bristol but we are happy to service clients from across the UK and we provide free initial meetings at our client’s convenience.
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