Receipts from Inheritance Tax (IHT) have risen to record levels: in the 2018/19 financial year, UK taxpayers paid HMRC a record £5.4 billion in IHT.(1) By 2023, this figure is expected to reach £6.3 billion.(2)
Many of these tax bills are avoidable. IHT is often described as ‘voluntary’, simply because so many people end up paying it through sheer inertia. Although many people – one in three, according to surveys – worry about IHT(3), only 6% of over-55s have actually discussed with a financial adviser what will happen to their estate when they die.(4) The reality is that when this happens, assets including your bank accounts, investments, ISAs, cars, art and antiques will be subject to IHT, other than the first £325,000. An additional ‘nil-rate band’ of currently £150,000 is available to those who pass on a family home to their children, grandchildren or other lineal descendants.
Making sound financial plans can make a great deal of difference to those you leave behind. Yet over a third of over-55s say they find the topic too hard to raise with their loved ones.(5) It’s not necessary to dwell on the subject, but this is the time to make sure you make the most of exemptions and tax reliefs as the end of the financial year approaches. Here’s how.
1. Give now (to your family)
Giving away money and assets while you are alive is perhaps the most rewarding way to reduce a future IHT bill. You can give away up to £3,000 a year, as well as make any number of small gifts up to £250. The value of those gifts will fall outside your estate immediately.
These could make a real difference to a child or grandchild’s future, perhaps at university, if they are raising a house deposit, or when they start out at work. You could also consider contributing to a Junior ISA or investing up to £2,880 a year in a pension. Bear in mind that one person cannot receive both a small gift and any of your annual gifting allowance in the same tax year.
It is also possible to utilise any unused gifting allowance from the previous tax year. By combining individual contributions, couples can potentially gift up to £12,000 by 5 April.
2. Give away income you don’t need
There is no limit on the number of regular gifts you can make out of your income, provided these don’t affect your standard of living. Keeping a record will speed up checks made later by HMRC – something you should remember for any gifts you make.
Inheritance Tax is often viewed as a tax on inertia and ignorance, but it’s a great little earner for the Treasury. Source: HMRC, National Statistics, December 2019.
3. Save more into a pension
Money saved into a pension is not normally subject to IHT. Should you die before you are 75, the proceeds from your pension can be paid as a lump sum or income to any beneficiary free from tax. After 75, beneficiaries will only need to pay tax at their marginal rate on withdrawals.
4. Review your Will
The surest way to make sure that your intentions are carried out after your death is to draw up a Will. Despite this, only three quarters of people aged between 45 and 55, and only half of people over 55, have a Will in place.(6)
Most couples who are either married or in a civil partnership leave everything to each other since this doesn’t usually attract IHT. But if you have a partner who falls outside this category, they could lose out to parents or children.
If your circumstances have changed, following a divorce perhaps, you may wish to amend your Will to make sure a new partner can inherit; or if you have remarried, to ensure as much goes to your children and grandchildren as you would like.
Planning your legacy? Here’s how to avoid a family argument
5. Buy life assurance in a trust
Sometimes, it isn’t viable to fully mitigate a future IHT bill. Taking out a life assurance policy where the sum assured covers the likely IHT bill, and placing it in a trust, could save your family from having to sell any of your assets to meet the liability. The trust ensures that the value of the policy falls outside your estate. It also means your executors will have the funds available when they need them, to settle your estate. Yet more than half a billion pounds are being handed over every year in IHT from life insurance policies because they have not been held in tax-efficient trusts.(7)
Making sure that your estate is in order, and that those you love will be well looked after can bring peace of mind and certainty. The end of the tax year is an ideal opportunity to discuss estate planning with your St. James’s Place Partner.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1,2 HMRC, National Statistics, December 2019
3 Prudential, May 2017
4, 5, 6 A survey of more than 2,000 people by wishLockr, 2018
7 www.unbiased.co.uk, July 2014
Frederick Charles Wealth Management Limited.
Building & Preserving Capital Investments
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