More than £5 billion went to the taxman in inheritance tax (IHT) in the year up to last May.
That’s money which would have been a big help to younger family members. So how can we get our money to go to our loved ones when we die, rather than the taxman?
We have more wealth to manage
It is something more of us need to think about. House price inflation over the last few decades has meant that many people have a great deal more wealth than they expected to pass on. But it also means that the taxman is more likely to help himself. IHT used to be a tax on the rich. Now it can be a tax that affects most of us. The threshold is £325,000 and tax is charged at 40% on everything in your estate above it.
There is however an extra allowance, the main residence nil-rate band, which for 2018/19 is £125,000. This means that for a spouse or civil partner, they can inherit your family home worth up to £450,000 with paying tax on it.
Careful what you do
To keep your estate free of inheritance tax you need to keep its total value below the IHT threshold. The simple way to do this is by giving away surplus funds while you’re still alive. However, the taxman has set limits. To prevent ‘deathbed giving’ as a means of avoiding tax you need to survive seven years or the sum will be included in your estate for tax purposes.
However, there are ways of giving away assets that can avoid the taxman’s attention.
You can give away £3,000 in cash each tax year without it being considered for IHT, even if you do die within the seven year limits. If you did not gift in a previous tax year you can give away £6,000, and couples can both make such gifts.
It’s best to keep notes of what you gave, and when you gave it. Keep them with your will, just in case the taxman investigates.
You can also make unlimited gifts from your surplus income to children and grandchildren. Your income needs to more than cover the amount you are giving. HMRC would need to see that the giving is part of your normal expenditure, which would be proved if you gave regular monthly amounts over a number of years.
A monthly standing order, and records of your income and expenditure could prove to the Revenue after your death that your giving fulfilled the conditions.
Giving away surplus wealth can be one way to ensure it goes to the next generation, but there are other ways to get your money to go where you want.
One is a whole of life assurance policy with the proceeds in trust. On your death, the payout could be used to take care of the IHT obligations.
Another solution may be to set up a trust. There are several types of trust, and whether or not this approach is right for you will depend on you and your family’s circumstances. Setting up a suitable arrangement will need professional support.
Anything relating to IHT can be complicated, and the best way to find the answers about passing on your wealth, or any other aspect of estate planning is to talk to an expert.
For the professional advice you need about ensuring your money goes where you want when you no longer have any use for it, talk to us at Continuum.
Office for Budget Responsibility – Inheritance Tax – published June 2017: May 2016 to May 2017 IHT Tax receipts.
The Financial Conduct Authority does not regulate Estate Planning, Tax and Trust Advice.
Levels and basis of reliefs from taxation are subject to change and depend upon personal circumstances.