For many people approaching later life, concerns around the impact of Inheritance Tax on loved ones is a very real and important issue.
Inheritance Tax (IHT) is a tax paid upon death calculated against the value of your remaining assets over the current Nil Rate Band of £325,000. Married couples/civil partners can pass on their unused allowance to one another. Currently, IHT is charged at 40%.
Additionally, there is a Residence Nil Rate Band (RNRB), which came into effect on 6th April 2017 and can be used to top up your Nil Rate Band. If you have a “Qualifying Residential Interest’, this is available on death after this date; you will have to pass your property to a direct descendant. The RNRB for 2019/20 is £150,000 and will rise to £175,000 in 2020/21 then in line with CPI thereafter. However, the RNRB available is reduced once your estate exceeds the £2 million ‘taper threshold’.
If your assets amount to £325,000 or more, you should consider your estate planning needs. Estate planning provides a valuable way to help protect your family from a large Inheritance Tax bill in the event of your death.
There are various estate planning options available to help protect against IHT and these include:
Making gifts to family members and friends
If you can afford to do so, distributing money early and leaving sums in your Will is incredibly tax efficient. You are allowed to give cash gifts of up to £3,000 per year, small gifts up to £250, wedding gifts and other gifts, such as between spouses/civil partners or to charities should also be exempt. Larger sums may be gifted but would require you to then survive a further 7 years before they become exempt.
These can be used to ring-fence assets for the future benefit of children or other chosen beneficiaries. Depending on your circumstances and what you wish to achieve with the capital you are gifting, there are various types of Trust available.
Whole of Life Insurance
This can be set up to pay a lump sum benefit to your beneficiaries on death to help pay any IHT liability. Care is needed to ensure the proceeds are written in Trust to avoid them being paid to your estate, which would then increase your tax liability.
Pensions can also be used as a form of estate planning, as the benefits on death should fall outside of your estate for inheritance tax purposes.
Making gifts to your family and friends while you’re alive can be a good way to reduce the value of your estate for Inheritance Tax purposes and benefit your loved ones immediately. But estate and tax planning are complex areas. Therefore, getting professional advice can help you avoid several big pitfalls when making estate planning decisions.
Another important part of estate planning is making sure you have a valid, up-to-date Will. If you die without a Will, your estate’s value will be distributed strictly in line with the intestacy rules set out by the government; which might not reflect your wishes or be the most tax efficient route.
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Miles Sneath, Director & award-winning Chartered Financial Planner