Most of us would prefer that our loved ones receive our wealth when we die, rather than the taxman. But with property becoming more expensive, more people than ever are becoming liable for inheritance tax.
At Continuum we are looking at what this means for our loved ones, what the costs are – and at the ways that you can potentially avoid or reduce inheritance tax.
What exactly is Inheritance Tax?
Many of us are only vaguely aware of Inheritance Tax, or IHT. We may think that it only affects the landed gentry, and that we are never called on to pay it.
IHT is levied on estates – the property, money and possessions that we can’t take with us when we go. It is easy to think it does not concern us, because it is only aimed at rich people. But these days, you don’t need to be a member of a fading noble family. The threshold for Inheritance Tax is just £325,000. A home or a large pension pot could mean that your estate becomes taxable. True, we don’t pay it ourselves, but it can take a big chunk out of what our loved ones receive.
The Treasury is raking in more than ever before in IHT receipts, with latest data from April to August this year standing at £2.7bn – £0.7bn higher than the same period a year earlier
If we don’t take the right precautions while we are alive, the taxman can help himself to 40% of everything above the threshold, leaving your loved ones much worse off.
Fortunately, there are ways to reduce an IHT liability, or even avoid it altogether.
A tax you can avoid
It is possible to avoid or reduce IHT, but you, rather than your beneficiaries will need to take the right steps to do so.
Give it away
One way to reduce IHT is to pass on your wealth while you are still alive. Parents or grandparents have an annual exemption, which allows them to gift up to £3,000 cash to their offspring free of tax. If you want to give them more, you can gift your wealth through a system known as Potentially Exempt Transfers (PETs) which allow you to give money away as long as you live for seven years.
There are some other ways to give. Many people will want to help their children and grandchildren especially if they are struggling to get on the housing ladder. A cash lump sum might be subject to the 7 years rule, but you could look at helping them with their regular mortgage payments. If set up correctly as gifts on a regular basis, genuinely out of surplus income they can be exempt from IHT immediately.
If you are giving the wealth now, rather than waiting until you have no further need of it, the key thing is to keep enough cash back for your own needs, which could include care.
Insure against it
The idea of insuring against tax seems absurd, but this is actually possible. Taking out a whole of life insurance policy could mean a large sum is payable on your death. With a little forward planning, you may be able to arrange this lump sum to cover the IHT liability. The taxman may then be paid off by your executors and your beneficiaries may receive your estate intact.
Of course, you don’t want the taxman simply to take a share of the pay out as part of your estate. Many insurance policies are automatically written into trust, meaning the money paid out is ring fenced and falls outside of your estate when IHT is calculated.
Trust to the future
You could also keep your wealth out of reach of the taxman by putting it into trust.
A trust is a legal arrangement where you give cash, property, or investments to someone else so they can look after them for the benefit of a third person. The taxman will simply not be able to touch them.
Setting up a trust is simpler than you might think. At Continuum we can help you see if it is a solution that might work for you.
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 estate planning strategy, you should seek independent financial advice before embarking on any course of action.
Levels and basis of reliefs from taxation are subject to change and depend upon your personal circumstances.
The Financial Conduct Authority does not regulate estate planning, wills, tax and trust advice.
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