Will the taxman take your children’s inheritance?

There is one type of tax that you’ll never have to worry about paying.

You can be absolutely certain that you won’t be paying a penny of the wealth you have made to the taxman under Inheritance Tax, or IHT.

Unfortunately, those you leave behind may have to. 

If your estate is worth more than £325,000 when you pass away, IHT could be charged at 40% on everything over the threshold, leaving your family with a massive bill. Inheritance tax was conceived as a tax on the wealthy classes, but decades of inflation have spread the burden from landed gentry to ordinary people.  

More than £7bn a year is now collected by HMRC from death duties. And the tax take will continue to soar over the next five years because the nil-rate band of £325,000, beneath which no IHT is paid, has been frozen by the Government until 2028. 

IHT is charged at a fixed rate of 40%, meaning the taxman will be enjoying the fruits of your labours, while your loved ones are deprived of the help you want to give them.

It could be help they desperately need. Decades of house price growth have all but frozen first-time buyers out of the property market, while millions of workers face an uncomfortable retirement.

Passing down wealth can make a huge difference to your children and grandchildren’s lives. But whether you want to help a grandchild get on the housing ladder, or help your children build up their retirement savings, you need to be careful how you do it – or the taxman may be the one enjoying your generosity.

Fortunately, there are ways to avoid the IHT trap.

Give it away

Giving wealth away to them while you are alive is one way to cut the bill your family will have to pay after your death.

But as you might expect, the taxman is not keen on this kind of largesse and sets rules on how much you can give.

He will allow you to give away £3,000 a year IHT-free. You can also give £2,500 to a grandchild in the year of their wedding, or £5,000 to your who child is getting married. 

Give larger sums, and they will be counted as part of your estate when you pass on, and your loved ones charged accordingly, unless you survive for another seven years. 

This does not just apply to money. If you give away your home while you are alive, you need to live seven years – and pay market rent to the new owner – for it to move outside your estate for IHT purposes.

Use a trust 

Trusts used to be a simple answer to pass down wealth tax efficiently, but they can be complicated – and many of the loopholes that made them so effective in the past have been closed. 

With a bare trust, the simplest option, you hold the assets as nominees for your children or grandchildren. The beneficiaries will have the legal right to the assets once they reach the age of 18 (or 16 in Scotland). 

There may also be tax implications. There is no limit on how much can be transferred into a bare trust. But you might still need to survive for 7 years to avoid IHT.

Trusts still have their uses – but they might be more effective if you are leaving your wealth to grandchildren rather than children. 

Use your pension

You could choose to gift your private pension on your death. This can be inherited by whoever you choose on your expression of wishes form, free from IHT. However, they will still pay income tax if you die after the age of 75 at their rate of income tax. If you die before 75, no income tax is payable – although HMRC is currently proposing charging income tax on inherited pensions where the policyholder dies BEFORE age 75.

Insure against the inevitable.

The simplest answer of all could be an insurance policy. If set up in the correct way, taking out a whole of life insurance policy provide a large sum payable on your death which your executors can use to cover your IHT liability, leaving your legacy intact.

What’s right for your loved ones?

These are only some of the possible solutions, and expert planning may be vital if your wealth is to go where you actually want it to.

The important thing to understand is that you need to act – and that it is never too early to do so. At Continuum we can work with you to avoid the inheritance tax grab.

Call us today.

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 estate planning, wills, tax and trust advice.

The value of investments can fall as well as rise and you may get back less than you invested.


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