Despite being known as a ‘voluntary tax’, the government received more than £4.6 billion in Inheritance Tax (IHT), during the 2016/17 tax year. (Source: HM Revenue & Customs (HMRC)).
On top of that, more than 750,000 homes in the UK are now worth more than £1 million (Source: Zoopla).
With so much potential value being passed down through the generations, what steps can you take to reduce the IHT your beneficiaries will pay?
How IHT is calculated
IHT is payable on the value of your estate which is above the nil band rate of £325,000, or £650,000 for married couples. An additional main residence band is applicable on estates which include a property in which you lived.
Anything above this will be taxed at 40%. This means that your loved ones could lose a significant amount of their inheritance.
Reducing the IHT due on your estate
It is possible to reduce the value of your estate to limit the amount of IHT your beneficiaries will have to pay when you die. Strategies used to do this include:
You can give gifts of money, belongings and even property, while you are alive. Each year, you can give monetary gifts of up to £3,000 as part of your ‘annual gift exemption’.
Furthermore, you may give as many gifts of up to £250 as you like. You may also give as many away from your normal income, as long as it does not affect your normal standard of living.
For weddings, you can give gifts of up to £5,000 to children, £2,500 to grandchildren and great grandchildren and £1,000 to other relatives and friends.
All these will be exempt from IHT.
Other gifts are classed as Potentially Exempt Transfers (PETs) and are subject to a sliding scale of tax over the next seven years. If you were to pass away within that time frame, the following amounts of tax will be due:
- Less than three years: 40%
- Three to four: 32%
- Four to five: 24%
- Five to six: 16%
- Six to seven: 8%
- More than seven: 0%
Unfortunately, gifted property only counts as a PET if you no longer benefit from it. Regardless of how long ago the gift was given, if you live in the house when you die, it may be subject to taxation.
2. Use Pensions
Pensions are not subject to IHT but may be subject to Income Tax. As a general rule, it is preferable to let money build up in pensions and take income from other sources, if they are available.
3. Make (and update) your will
You can include IHT-efficient plans in your will. But, most importantly, you need to have one in place to avoid dying intestate. This will leave the fate of your estate and belongings in the hands of the state.
4. Make the most of Life Insurance
Many people take out Life Insurance as a form of financial security for their family. However, if you know that your loved ones are likely to lose some of their inheritance to the tax man, you could take out a policy which is equal to that amount. This will ensure that they will be able to fully pay the tax due, whilst retaining the full amount you want to leave to them.
5. Seeking advice
While the above tips might help you to take charge of your finances and reduce the amount of IHT your loved ones will pay on the assets and property you leave behind, nothing can take the place of professional financial advice.
Estate planning can be hugely helpful to loved ones and beneficiaries, when done correctly. However, due to the complex nature of the rules surrounding the practice, it is always advised that you seek a professional’s insight before making any decisions.
Talking to a professional can give you a better insight into the options available to you, as well as boosting your confidence in making financial decisions and working to meet your goals. They will also suggest the most efficient methods of reducing your family’s IHT bill, whilst keeping your assets in line.
For more information or to talk to a financial adviser, please contact us on 0800 612 8099 or request a call back by clicking here.