Inheritance Tax - Britain’s most hated tax?

Inheritance Tax (IHT) used to be something that was associated with the super wealthy. With property values having risen over the decades, you only need to have an estate worth more than £325,000 or £650,000 for married couples to be liable to Inheritance Tax when you pass away. This means that anything above this amount (known as the Nil Rate Band), could be subject to 40% tax, which your estate will have to pay. This may not be the kind of legacy most people think of leaving behind. While most of us accept that paying tax is a part of life, many would like to ensure that as much as possible will get passed onto loved ones instead. 

This is a complex area and, if a potential IHT liability is a concern for you, one of the simplest things you can do is to spend or give your money away during your lifetime. In this guide, we set out the main exemptions available which you can start to make the most of today.

Gifting

·         You can gift any amount to your spouse or civil partner free of tax. However, be mindful when doing this that you may just be passing the liability on rather than reducing it for your family.

·         Money gifted to anyone other than your spouse/civil partner before you die is still usually counted as part of your estate, unless you live for a further seven years or more after making the gift. This will be classified as a ‘Potentially Exempt Transfer’ and between making the gift and the seven years passing, the amount of tax payable will be tapered if gifts total more than £325,000.

·         You can gift £3,000 each year, Inheritance Tax free.  Remember, you can gift more but the gift will not automatically be exempt from tax.

·         You can gift £250 per year to as many people as you like, as long as they are not also in receipt of the above £3,000 exemption.

·         You can give a wedding gift of £1,000. This increases to £5,000 if it is your child getting married or £2,500 for a grandchild.

Normal expenditure out of income

If you can afford to give money regularly from your income without affecting your lifestyle, then it should be exempt. For example, making regular contributions to your grandchild’s saving account or helping a child with living costs while at university.

Charity
Any money that you leave to a UK registered charity will be free from Inheritance Tax.  What's more, if you leave more than 10% of your taxable estate to a charity in your Will, the Inheritance Tax rate for the rest of your estate can fall from 40% to 36%.

Trusts

The idea of setting up a Trust can be daunting, but it needn’t be. It can be a useful tool that many don’t think to take advantage of enough. By putting assets into Trust, you are essentially removing them from your estate for IHT purposes, but with the benefit of ensuring assets are kept in the family over generations, if that is what you wish. The biggest advantage of Trusts is that they can be set up exactly to your own personal wishes, ensuring that the right money is in the right hands at the right time.

Have you got a Will?

One of the most important things to do is to make sure you have a Will in place. If you don’t, your estate will be subject to the strict rules of intestacy. If this happens, the people you care about may lose out and your beneficiaries may end up paying more tax than necessary. For example, by leaving your residential property to direct descendants, you may qualify for the ‘Residence Nil Rate Band’ which means that an additional £175,000 (2020/21) of your estate could be IHT free. In addition, your spouse or civil partner will never have to pay tax on assets you leave them, regardless of the amount. Making the most of this in your Will can save your family a small fortune.

It is of the utmost importance to ensure that you have enough resources for your own needs and standard of living before considering gifting anything away. The good news is that there are plenty of things you can do, in your lifetime, to take care of a potential Inheritance Tax problem. Other solutions may include taking out an insurance policy, investing in an IHT mitigating product or even contributing more into a pension. Finding the right options for you will depend on your personal circumstances and it’s important that you take advice.

Estate planning can be complicated but it doesn’t have to be. If you’re concerned about leaving your money to your loved ones in the most tax-efficient and protected way, then get in contact with us – we’re here to help.

Rebecca Daly

Financial Paraplanner

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