Inheritance tax planning is something many people delay thinking about. Even those with a sizeable portfolio tend to neglect this area of their wealth management. However it is important to appreciate: the implications this can have for your estate, the impact inheritance tax can have on your loved ones, and the options available to reduce it.
This detailed article will assist you in making the most astute choices.
Our comprehensive guide to inheritance tax planning
1. Which assets fall under inheritance tax?
The assets that are taxable under inheritance regulations include cash savings and lump sums, your investment portfolio, your property portfolio including any business property, any businesses you own, any vehicles you own, and any life insurance payouts. As you can see, the net is cast rather wide.
2. What percentage of tax is payable?
On any amount over £325,000 inheritance tax is a hefty percentage, coming in at 40%. This reduces to 36% if you donate a minimum of 10% of your assets to charitable causes.
It is important to appreciate the implications inheritance tax can have for your estate, the impact it can have on your loved ones, and the options available to reduce it.
3. Property inheritance tax: the new rules
From April 2017 a scheme is to be phased in whereby inheritance tax will no longer be payable on property worth up to £1m, or £500,000 for single people, if has been used as your main residence and is passed on to a direct descendent, namely a child, step-child or grandchild. The tax-free threshold will begin at £100,000 and rise by £25,000 each year until 2020.
4. Tax exemptions
Many baby boomers – people who are now over the age of 50 – will have an estate worth more than the nil-rate inheritance tax threshold of £325,000. However it’s worth checking to see if your occupation falls under inheritance tax exemption classification in the event that you die in active service.
Eligible high-risk categories include emergency services personnel and humanitarian aid workers. Of further note, this exemption applies in the event of an injury sustained through active service that contributes to or hastens later cause of death.
5. Inheritance tax planning for married couples
For married couples and civil partners, the tax-free threshold doubles to £650,000. When a spouse dies, any unused portion of their tax-free allowance is passed on to the surviving partner. An example of this would be if your assets are worth £500,000 and your spouse’s assets are worth £500,000. You would pay nothing on the first £325,000 of their assets, which you inherit, and 40% on the remaining, whilst still retaining a tax-free allowance on the first £325,00 of your own assets.
6. Reducing inheritance tax through gifting assets
Anything you give away as a gift seven or more years before you die is not subject to inheritance tax. However, you must give the gift freely and with no return benefit to yourself. The most commonly considered example of this is giving your property to your children before you die. In this case, tax exemption only applies if you no longer live in the property after you pass it on.
Anything you give away as a gift seven or more years before you die is not subject to inheritance tax.
Other ways to reduce your inheritance tax bill include giving away up to £3,000 per annum to a benefactor of your choice, giving an asset as a wedding gift, and giving money to charity. Should you die within seven years of gifting your assets, the good news is there is a sliding scale on tax payable for each year before death within the seven-year timeframe.
7. The importance of drawing up a will
Making a will is essential for the effective management of your estate in a manner that can be carried out in accordance with your express wishes. Without a will, tax complications can and do occur, which is the last thing anyone wants to leave behind for their loved ones.
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8. For more detailed advice, download our free Inheritance Tax Planning Guide
We have put together a guide containing detailed advice and our expert opinion on the best ways of managing your inheritance tax planning. We are an experienced team, capable of guiding you through the more in-depth areas of inheritance tax planning, such as placing your assets in trust.
You can download the guide instantly and for free by clicking the button below.
Start reducing your inheritance tax – find out more
Don’t forget your hard work and careful financial planning should benefit you and your spouse in your lifetime. Obtain expert advice to help you make the most of your assets and enjoy the fruits of your labour.
Expert Wealth Management provides independent financial advice tailored to the individual needs and circumstances of every client. Receive personalised inheritance tax advice to suit your exact requirements. This will enable you to plan realistically for your big dreams and the practical needs of the future.
