Understanding inheritance tax planning

UNDERSTANDING INHERITANCE TAX AND ITS IMPLICATIONS

Nothing is certain in this world except death and taxes, according to a quote attributed to the 18th century American statesman Benjamin Franklin. Inheritance tax rolls both of these certainties into one and is the most emotive tax of all for many people.

Why does inheritance tax 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 and any other properties, savings, investments, your business and any other assets.

Inheritance tax 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. . Get it right and you’ll help your loved ones immensely; ignore the topic and you may well regret it.

But inheritance tax 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.

STRATEGIES TO MINIMISE INHERITANCE TAX 

When it comes to the ground rules, everyone has a nil rate band of £325,000. If an estate is valued at more than that, tax may 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 aheadit’s complex but well worthwhile. 

Focusing first on exemptions, notably there’s no inheritance tax to pay if you leave everything  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 inheritance tax. 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. There have been some recent changes to the tools you can use in the Labour government’s first Budget: notably reducing tax reliefs on businesses and farmland, and placing pensions within your estate for tax purposes. But the other tools remain as they were.

Various gifts are free from Inheritance tax. 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 inheritance tax. What’s more, you can give away surplus income without inheritance tax implications.

Most significantly, you can gift an unlimited amount of money without inheritance tax under the ‘seven-year rule’. If you live for seven years, the person who received the gift doesn’t have to pay inheritance tax. If you die before then, there may be some tax to pay, although the tax rate tapers between three and seven years from the date of the gift.

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.

Finally, life assurance is often overlooked. It doesn’t reduce the potential inheritance tax liability but written under trust it can provide your beneficiaries with the money to pay the bill.