We can’t take it with us, but most of us would prefer that our loved ones receive our wealth when we die, rather than the taxman. Individually everyone has the £325,000 nil rate band limit.
Inheritance tax, or IHT, is a tax we personally never have to pay, because it is levied on our estates – the property, money and possessions we leave. However, although we don’t pay it ourselves, it can take a big chunk out of what our loved ones receive.
There’s no IHT to pay if the value of your estate is below the £325,000 IHT threshold (the nil rate band). If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren your threshold can increase to £475,000 for the 2019/20 tax year.
If we go past that figure – which is easy to do these days with high property prices and in some instances large pension pots not written into trust – our estates become taxable. If we don’t take the right precautions while we are alive, the taxman can help himself to 40% of everything above it.
In March 2019, HMRC reported IHT receipts of £5.4 billion, a staggering 44.4% increase compared with the previous month.
You can’t avoid death or taxes. But there are some simple steps you can take to reduce your IHT liability.
1. Keep it in the family
You can give anything you want to your spouse or a civil partner, free of tax for their lifetime. So, your widow or widower should be safe in the home you have shared. If you are married or in a civil partnership and your estate is worth less than your threshold (nil rate band), any unused amount can be transferred to your partner’s threshold when you die.
2. Be generous
Giving away cash before you die could potentially mean that no IHT is payable. You must live another seven years after giving the money away to avoid ‘deathbed giving’, but you have an £3,000 tax-free gift allowance to use each year – and if you haven’t used it one year, you can combine it with the next year’s allowance.
You can also give up to £250 each year to anyone or make a wedding or civil ceremony gift to a family member up to £1,000 per person, £2,500 for a grandchild or £5,000 for a great-grandchild. Tax rates applying for tax year 2019/20
3. Put it in trust
When you put cash, property or investments into a trust, those assets are no longer yours – they belong to the trust – although you may be able to have use of things like property if the trust allows it. But remember that assets placed in trust only fall outside of your estate for IHT purposes if you live for at least seven more years.
4. Insure your life
A whole of life insurance policy can provide a simple, although not cost-free way to deal with IHT. You could consider taking out a policy and placing this in trust, and your executors can use the proceeds to offset any potential IHT charge. Obviously, the younger you are when you take out the policy, the less it will cost, so to make economic sense, you will need to do this early in life.
5. Make a will
Making a will may be one of the most effective ways to minimise IHT liabilities. Without a will, your estate would be dealt with according to the Rules of Intestacy, which could mean more of it would potentially go to the taxman.
6. Get some expert advice
Whatever the answer you need for your IHT questions, getting expert advice, and getting it as soon as possible will help. Simply call us at Continuum for the advice you need.
The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment strategy, you should seek independent financial advice before embarking on any course of action.
The Financial Conduct Authority does not regulate, taxation and trust advice, will writing, probate and legal services.
yourmoney.com – Brits are paying more IHT: five tips to cut your bill – 24th April 2019