Inheritance Tax – The tax you force your children to pay
Inheritance tax (IHT) has been in the news lately, thanks partly to changes made in the budget which could increase its impact still further.
But it is the tax that gets ignored, because we never have to pay it. But it could mean a big problem for those we leave behind.
You may have heard that more and more families are paying it, but you may not know if yours will be among them, or how much the taxman will take when you die.
And you may not know that there are some simple steps you can take to help reduce your liability.
At Continuum we have prepared a guide to understanding inheritance tax.
What is inheritance tax and who pays it?
Inheritance tax is a tax on the property, possessions, and money you leave behind when you die, known as your estate.
If your estate is below the nil-rate band of £325,000, no IHT is payable. But as soon as it exceeds £325,000, the portion above this threshold is taxed at 40%.
Inheritance tax is a ‘death tax’. You don’t pay it yourself. Your executor will be responsible for actually paying HMRC, but the money will be taken from the funds you intended to go to your loved ones.
40% of the wealth you leave to your loved ones could be snatched by the taxman once you go past your basic allowance – but it does not always have to be that way.
Inheritance tax allowances
Cutting Inheritance tax liabilities starts by making full use of some important allowances.
First, you can leave everything to your spouse or civil partner exempt from IHT. Moreover, any unused portion of your nil-rate band can be transferred to your surviving partner, potentially doubling their tax-free allowance.
Second, you can use Residence Nil-Rate Band (RNRB). This is a concession that, if you leave your main home to your children or grandchildren, provides an additional allowance. The RNRB is currently £175,000.
This means you could pass on up to £500,000 tax-free (£325,000 + £175,000) if you include the family home in your estate – and double that, £1 million, if you can call on a spouses unused allowance.
Taking steps to help reduce Inheritance Tax
Using allowances might not be enough to keep your family’s wealth out of reach of the taxman. Fortunately, there are additional steps you can potentially take.
Giving: giving wealth away while you are alive can put it out of reach of the taxman when you are dead. Gifts of up to £250 per person are exempt, and you can give away up to £3,000 per tax year under an annual exemption. This allowance can also be carried forward one year if unused.
You can also give tax-free gifts for weddings or civil partnerships, of up to £5,000 for a child, £2,500 for a grandchild, and £1,000 for anyone else.
Giving larger gifts – even giving away houses – may avoid IHT, but there is a catch. Large scale giving is known as ’potentially exempt transfer’. It is only potential because to prevent deathbed giving to avoid tax, you need to survive for seven years for your generosity to be exempt. However, if you die within this period, a sliding scale known as ‘taper relief’ may reduce the tax owed.
Trusts: Trusts put your assets out of your reach, and under the control of a trustee, who will manage them according to your instructions. They can help keep them out of reach of the taxman, too, provided certain conditions are met. Different types of trusts have varying tax implications, making professional advice essential.
Life Insurance: A life insurance policy will pay out on your death – and increase the money in your estate for the taxman to share in. But if the policy is written in trust, the payout does not form part of your estate.
This means that it can be used to pay off an inheritance tax bill, leaving bequests untouched.
Arranging a suitable policy and arranging for it to be placed in trust is simple – if you get the help of an experienced independent financial advisor.
Get an expert on your side
The first step to reducing your IHT is to estimate the value of your estate.
The second is to look at the allowances that may apply - and the third is to get expert advice. Like most taxes, the rules on IHT are complicated. Inheritance Tax planning demands specialist knowledge.
A call to us could provide the specialist knowledge you need to help ensure your family, and those you love, get the benefit of your wealth, not the taxman.
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The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable Inheritance Tax 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 or will writing.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
We recommend that you seek professional advice on personal taxation matters.
The value of your investment can go down as well as up and you may not get back the full amount invested.