Inheritance tax (IHT) is the one tax we never have to pay ourselves. But that does not stop it being the most unpopular of all, because after we die it means the taxman gets a share in our wealth before our loved ones.
It can be a very large share. IHT is charged at is charged at 40% of our estates – everything we leave behind, after a basic allowance of £325,000, and some concessions for the family home. Rising house prices and general wealth means more and more of us fall into IHT.
At Continuum, we can help you stay out of the IHT trap. Here are just some of the solutions we can help you arrange.
Buy a bigger home
The boom in property prices means that many more of us fall into IHT liabilities. But you can make this work for you, thanks to an important tax concession.
If you bequeath a property to your direct descendants, residence nil-rate band (RNRB) concessions mean an additional threshold before IHT becomes due on your estate. This is a further £125,000 in the current tax year and will rise to £175,000 in 2020/21, after which it will keep pace with inflation. Putting more of your wealth into your home can protect it from IHT.
Give it away
Giving away surplus cash can put it out of your estate, meaning that no IHT is payable. But you must live another seven years after giving the money away to avoid ‘deathbed giving’.
However, you have an annual £3,000 tax-free gift allowance, which will let you put money outside your estate immediately. If you haven’t used your annual exemption 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, rising to £5,000 for a child or £2,500 for a grandchild or great-grandchild.
If you leave 10% or more of your net estate to a charity, you may qualify for a reduced inheritance tax rate of 36%.
Set up a trust
When you put cash, property or investments into a trust, those assets are no longer yours – they belong to the trust. But as with large gifts, assets placed in trust only fall outside of your estate for IHT purposes if you live for at least more seven years.
Insure your life
A whole of life insurance policy could be the simple way to deal with IHT. Take out a policy in trust, and your executors can use the proceeds to pay off the IHT bill. Of course, you will need to do this early. The younger you are when you take out the policy, the lower the premium.
Look at your pension
Pensions can provide a solution to inheritance tax. If you die before 75 the money in your pension can be passed to anyone you nominate completely tax free. If you die after 75 your beneficiaries usually only have to pay income tax on what they take out of the pension.
Make a will
Making a will is the most basic estate planning measure you can take to minimise IHT. With no will, your estate would be processed according to the Rules of Intestacy, which could mean more of it would go to the taxman. Please seek alternative specialist advice for will writing.
Get some expert help
Whatever the solution you need, getting expert help, and getting it as soon as possible is essential for successful estate planning. Simply call us at Continuum for the help you need.
The value of your pensions and investments can fall as well as rise and you may get back less than you invested.
The Financial Conduct Authority does not regulate wills, tax and trust advice.
yourmoney.com – Seven things to consider if inheritance tax is a problem – 7th September 2017
moneyadviceservice.org.uk – Top 5 ways to cut your Inheritance Tax
thisismoney.co.uk – 10 ways to avoid inheritance tax: How to stop the taxman grabbing some of your estate from your loved ones – 8th November 2017
ft.com – How to make the most of new inheritance tax rules – 5th May 2017