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Inheritance Tax Planning
Plan for your family's future.
There are many ways you can reduce your Inheritance Tax liability, speak to us at Holistic, to see how we can help you.
What is Inheritance Tax (IHT)?
IHT is the tax paid out of a deceased person`s estate. Simplified this tax is usually 40% of any surplus assets over the deceased persons IHT nil rate band - currently £325,000.
However, there are a number of IHT rules, allowances and IHT tax planning tactics that can reduce and even mitigate this.
How can I reduce a future IHT liability?
Plan, plan, plan your future is the answer. If you believe inheritance tax is going to be an issue then you need an estate planning strategy. You need to decide what you are going to do short, medium and long term and ultimately how your assets are to be dealt with upon your death.
What are the rules surrounding IHT?
Each UK individual has a nil rate band of £325,000
If you die your spouse/civil partner inherits any of your unused IHT allowance. Effectively meaning that combined there may be a total IHT allowance of £650,000 on the death of your spouse/civil partner
It doesn't stop there. An additional residence nil rate band can be claimed when your estate contains a property that you intend to leave to your heirs (direct descendants - rules apply). This is an extra £125,000 each (2018/19 tax year), this allowance keeps increasing by £25,000 per tax year up to 2020/21
This means that a married/civil Partnership couple could currently pass on (at 2nd death) a combined £900,000 inheritance tax free
The additional residence nil rate band is reduced for estates over £2,000,000 and beyond £2,250,000 an estate will not benefit from this additional allowance
Can`t I just give some of my assets away whilst I am alive, then there would be no IHT to pay on my death?
Not necessarily. Anyone making a Gift through a transfer of assets has to survive a period of at least 7 years (the 7 year IHT rule) following the gift for that gift to remain inheritance tax free. Such a transfer is classed as a potentially exempt transfer (PET), until the 7 years are satisfied.
Simply put, as long as you survive 7 years from giving the gift then it should not attract IHT.
So if you died within the 7 year period following a transfer of assets, then these assets would be included in the calculation of inheritance tax. There is however a sliding scale of tax dependent on when you died within the previous 7 year period.
Note: Gifts where you still have an `interest in` no matter how long ago you gifted the asset will still fall back into your estate at death for IHT purposes.
£5.2bn paid to the Treasury in the 2017/18 tax year
To reduce potential IHT issues you should consider:
Will. Writing a Will makes sure that your remaining assets are distributed in line with your wishes
Gifting. Usually none of us know how long we have remaining on this planet. But if we give away some of our assets and survive the 7 year rule then there should be no further IHT liability
Annual Gift Allowance. You can give away each year £3,000 as a gift without incurring IHT. This can be carried forward one year, meaning that if not used it can be a maximum £6,000 the following year
Small Gifts. You can give away gifts of up to £250 to as many people as you want to
Wedding Gifts. You can gift to your child £5,000 prior to a wedding (the wedding must happen for this to be exempt from IHT). A Grandparent can gift £2,500
Excess Income Gifts.You can gift surplus income if you have enough income after covering your normal/usual standard of living costs. An example could be paying into a grandchild's savings account
Trusts. There are a range of Trusts that can be used as part of an IHT strategy to reduce inheritance tax. This area is complex (see Holistic Law website for further information)
Tax Reliefs. There are further exemptions from IHT which are available to Businesses, Agriculture and Woodland
Charitable Gifts. You can gift to a registered charity and such gifts won`t form part of an IHT assessment on your death
Charitable Gifts in a Will. You can also gift to a registered charity, museum, University in your Will. This is called leaving a charitable legacy. Equally if this gift amounts to more than 10% of the net estate value on your death then the overall IHT `bill` is cut from 40% to 36%
Life Assurance. You can take out a life assurance policy, the aim of which would be to clear an IHT liability on your death
Note: It is important to keep accurate records of all gifts that you have given, otherwise IHT could be due on these gifts upon your death
Whether spending your wealth yourself to remain under the IHT nil rate band or gifting, its all about planning the future
- Inheritance Tax Planning
Trusts. There are a range of Lifetime and Will Trusts that can be utilised for both property and money assets.
Trusts can be quite complex in nature, which is why we work with our sister company, Holistic Law, to guide and build the right IHT strategy for you.
Click here to open a new page for Holistic Law.
Government projections of future IHT receipts are estimated to be worth £6.2bn by 2021/22 (this is even with the residence Nil Rate Band)
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