What is Inheritance Tax Planning?
It may come as a shock to discover that a large proportion of your wealth might be subject to Inheritance Tax (IHT) when you die.
This includes all of your assets such as the family home, investments, life assurance plans not in Trust, and even old family heirlooms.
A professionally-produced Inheritance Tax Plan can help minimise the impact of IHT through strategies such as gifting, setting-up trusts and taking advantage of tax allowances and reliefs.
When do you pay Inheritance Tax?
Calculating how much your family will have to pay is often, although not always, simple.
Your estate will be subject to IHT if, when you die, it exceeds the individual nil-rate band – which currently stands at £325,000.
Count up the value of all the assets, subtract the nil-rate band and the Residential Nil Rate Band (RNRB) if applicable, and what is left will be taxed at up to 40% – paid for by your estate.
If your spouse dies before you without fully using their nil-rate band, their unused amount can be carried forward to use when you die.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
How does the residence nil-rate band work?
With the family home often making up a large percentage of an estate, the UK Government has introduced an additional nil-rate band on top of the £325,000, known as the ‘residence nil-rate band’ as mentioned above. The current residence nil-rate band is up to £175,000. This means that if you give away the home you lived in before you died to your children (including adopted, foster or stepchildren) or grandchildren, they wouldn’t have to pay IHT on the first £500,000 (£325,000 nil rate band + £175,000 residence nil-rate band) of its value if they sold it.
If you are a married couple or in a civil partnership then you can combine both your nil-rate bands, meaning that the first £1M of your assets, including your property, are free from IHT.
As with most things in life, it’s rarely as simple as the example detailed above though! There’s a lot of complicated rules and calculations to follow when you’re working out how much IHT your family will have to pay, but we’re here to help. The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
What to do about Inheritance Tax
Careful IHT planning is all about passing as much of your estate as possible to who you want to receive it, rather than to HMRC. It’s also about maintaining flexibility and control over any arrangements that are made.
There are a number of things you can do to help with this, including:
Make a Will – Draw up a Will and ensure it properly expresses what you wish to happen to your wealth. We can help you plan it correctly to save the maximum amount of tax.
Consider giving your family gifts – You can reduce the total value of your estate by giving your family financial gifts while you’re still alive.
Consider an IHT-efficient fund – There are products available that enable the beneficiaries of your estate to meet any potential IHT tax liability without disturbing family wealth.
Protect all that you hold dear – Gifting and/or the use of trusts are often considered key strategies in helping you pass on as much of your wealth as possible to your family.
Give them a gift for the years ahead – Making a financial gift can be a valuable way to reduce the amount of Inheritance Tax your loved ones will have to pay when you die.
Using Trusts – A Trust places the right money in the right hands at the right time.