We don’t tend to worry too much about inheritance tax. We know that it is high, being charged at 40%. We might think that it is unfair, but because we never have to pay it ourselves we try to ignore it.
That is an expensive mistake. Although we obviously never pay inheritance tax (or IHT) ourselves, it can take a large slice of the wealth we leave for our loved ones after we are gone.
It does not have to be that way.
IHT is largely a discretionary tax. Like all taxes, it needs to be paid, but putting your financial affairs in order will ensure your beneficiaries receive your assets in the most tax efficient way possible. At Continuum we are looking at how that can be done.
A growing problem
Inheritance tax is on the rise. Receipts for April 2021 to January 2022 were £5bn, £0.7bn higher than in the same period 12 months earlier, according to the latest data from HM Revenue & Customs.
Thanks to the ever-increasing cost of property, many more of us fall into the IHT trap, which is levied on all estates after an initial allowance of £325,000 – although there are some special arrangements which allow a family home to be passed on intact.
Rising personal wealth, from family homes to stock market portfolios is being assessed against an IHT threshold that hasn’t increased since 2009 and will remain frozen until 2025/2026. In practice, this is a tax rise by stealth.
There may have been some other factors behind the increases. HRMC said it reflected announcements of rises to probate fees in England and Wales in February 2017 and November 2018 which have caused executors to bring forward tax payments to avoid the prospect of higher fees. But things could get worse still. Some observers suggest that the Chancellor’s next budget could bring in changes to personal taxes that may affect the feasibility of families passing wealth to the next generation and, accordingly, the level of IHT payable.
Even if IHT remains unchanged in the next budget, many families can still expect to be faced with increased IHT bills in the coming years, given that both the nil rate band and residence nil rate band have been frozen until at least April 2026.
This means it is more important than ever for families to think carefully about their tax planning and take professional advice.
What can you do?
IHT could mean that the taxman could seize 40% of all the wealth you have created in your lifetime above the nil rate band and could mean that your loved ones look forward to a future where the things they take for granted – holidays, a car, even the roof over their head, could suddenly be out of reach.
Fortunately, by planning ahead it is possible to avoid IHT. But it is you rather than your beneficiaries who will need to take the right steps – and to take them now.
One way to avoid the taxman taking a proportion of your wealth is to pass it on while you are still alive. Parents or grandparents can gift up to £3,000 cash to their offspring free of tax. To give them more, perhaps as a leg up onto the housing ladder you can gift wealth through a system known as Potentially Exempt Transfers (PETs) which let you give money away free of any tax implications, but only if you live for another seven years.
Ensure that you keep enough cash back for your own needs, which could include care.
Another way to keep your wealth out of reach of the taxman is by putting it into trust. A trust is a legal arrangement where you give cash, property or investments, for your appointed trustees to look after them for the benefit of a third person. In many cases, the taxman will simply not be able to touch them.
Trusts sound complicated – but they are surprisingly easy to set up, and very effective at preserving family wealth.
Insure against tax
Taking out a whole of life insurance policy could provide a large sum on your death. You don’t want the taxman simply to take a share of the payout as part of your estate – but by writing your policy into trust the money is ring fenced and falls outside of your estate when IHT is calculated. This means that your executors can use it towards paying off the taxman and your beneficiaries can potentially receive your estate intact.
Getting the help you need
But the most important step of all is to call for professional help.
IHT, like most taxes, can rapidly become complicated and if you are planning to avoid it, you will certainly need an expert on your side. At Continuum we have the expertise to help ensure your loved ones receive your wealth, not the taxman.
Whatever the answer you need for your IHT questions, getting expert advice and getting it as soon as possible is essential – for those who depend on you and for your own peace of mind. 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 estate planning strategy, you should seek independent financial advice before embarking on any course of action.
The value of investments can fall as well as rise and you may get back less than you invested.
The levels, bases and reliefs from taxation are subject to the individual circumstances and may be subject to future change.
The Financial Conduct Authority does not regulate taxation and trust advice and will writing.