On 30 October, the UK’s new Labour government will unveil its first budget. While its details won’t be known in full until the day itself, there’s widespread speculation about increases to a range of taxes, including the most emotive tax of all for many people—inheritance tax (IHT).
Why does IHT matter so much? Because it’s a tax on your estate, all your belongings, when you die. What you pass on to loved ones shapes your legacy, setting out what will happen to your house, any other properties, savings, investments, any business and any other assets.
IHT planning can reach right to the heart of your financial affairs. It’s not just about how you might choose to pass on assets to loved ones or favourite charities. It also affects the management of your investment portfolios and, more broadly, can mitigate the amount of tax paid by your beneficiaries while giving you immense satisfaction. Get it right and you’ll help your loved ones immensely; ignore the topic and you may well regret it.
But IHT planning is beyond complicated, it’s incredibly intricate, which is why you need help from specialists. At Brown Shipley, we can help you to make a plan that reflects your unique family circumstances and wishes. There are many ways that wealth can be passed on and we help you to determine what’s best.
The ground rules
When it comes to the ground rules, everyone has a nil rate band of £325,000, although this could well change in the coming budget. If an estate is valued at more than that, tax will have to be paid at 40% on the value above the nil rate band. But successive governments have put in place several exemptions and tools that can limit the amount paid if you plan aheadit’s complex but well worthwhile.
Focusing first on exemptions, notably there’s no IHT to pay if you leave everything above the £325,000 nil rate band to a spouse or civil partner. Better still, this transfer doesn’t use the deceased’s nil rate band. So, when the surviving spouse or civil partner dies, their estate can claim any unused nil rate band from the partner who died first: this can result in a combined nil rate band of as much as £650,000.
Additionally, you have a residence nil rate band of up to £175,000. This applies to your family home and, when added to the other nil rate bands, allows married couples or civil partners to pass on up to £1m of assets on death without IHT. However, there are strings attached and this can be problematic for large estates (in excess of £2m).
Tools for passing on wealth
Whether it’s gifts, tax-efficient investments, pension planning or trusts—there are many tools to pass on wealth to your family and people you care about.
Various gifts are free from IHT. Each person has an annual gifting allowance of up to £3,000. You can also make as many small gifts as you like of up to £250, although not to the same person. Larger gifts can be made at the time of a wedding or civil partnership. For instance, you can give up to £5,000 to a child free of IHT. What’s more, you can give away surplus income without IHT implications.
Most significantly, you can gift an unlimited amount of money without IHT under the ‘seven-year rule’. If you live for seven years, the person who received the gift doesn’t have to pay IHT. If you die before then, there may be some tax to pay, although the tax rate tapers between three and seven years.
Beyond gifts, trusts may be useful for giving large sums of money or where families are complex, for example involving divorce, remarriage, children and stepchildren. Trusts help you pass wealth to future generations in a careful and considered way.
For some, tax-efficient investing may be especially interesting. Certain investments qualify for relief from IHT under Business Relief rules. Once these investments have been held for two years, the value for IHT is zero. However, they’re higher risk and not for everyone.
Finally, life assurance is often overlooked. It doesn’t reduce the potential IHT liability but written under trust it can provide your beneficiaries with the money to pay the bill.
Anticipating the future
But planning for IHT is far more than an exercise in just managing tax. People often find that passing some of their wealth to the right people in the right ways during their lifetimes is a source of great pleasure.
IHT planning is far from straightforward, though. Part art and part science, it requires a good understanding of your wishes and emotions, as well as technical knowledge from specialists such as those we employ at Brown Shipley.
This article is a summary of how IHT planning can make a big difference when considering passing on your wealth. Ultimately, though, governments set the rules and it’s likely that the October budget will bring some changes. As specialists, we will analyse any amendments to IHT exemptions and tools, giving you our findings about their implications.
Get in touch with a Brown Shipley Client Advisor to learn more and discover how you can adapt your plans to any changes introduced in government budgets.
Start the conversation. We’re here to listen.
Important Information
● Investing puts your capital at risk.
● The value of your investments can go down as well as up, and you could lose some or all of the money invested.
● Tax treatment depends on individual circumstances and is subject to change.
● Tax planning is not regulated by the Financial Conduct Authority or the Prudential Regulation Authority.
● To become a client of Brown Shipley, clients require £1m in investable assets
