Have you thought about how much your loved ones will need to pay in inheritance tax (IHT) when you pass on your wealth? Official statistics show the national IHT bill is climbing but there are steps you can take to reduce this as much as possible.
Figures from HMRC show that the total amount of IHT paid during 2017/18 reached a record high of £5.2 billion. In just a year, the IHT bill has increased by 8% (£388 million) and it’s almost doubled since 2010/11 when it was just £2.7 billion. With all wealth over the nil rate band subject to a 40% tax, it can be a huge cost.
IHT can not only mean less of your money goes to those you want to benefit from it but can put pressure on your loved ones at a time when they’re already grieving. In some cases, calculating IHT can be a drawn-out process, causing stress, and it may mean your recipients are forced to sell assets in order to cover the bill they’re left with.
If you want to ease the burden of IHT, here are six ways you can reduce the amount your loved ones will owe.
1. Make a will
No matter how large your estate is or the amount of IHT you’re expecting loved ones to pay, making a will should be considered a priority.
A will should underpin all your estate planning and can ensure that your assets are distributed in line with your wishes. Without a will, your assets will be distributed according to intestacy rules and may be liable for IHT that could otherwise be avoided. Sitting down to think about your will gives you the perfect opportunity to assess IHT and create a plan that will reduce it.
2. See if your wealth is below the nil-rate band
When you’re making plans for your legacy wealth, the first step should be to get an understanding of what IHT is likely to be due.
The current nil-rate band is set at £325,000 and will remain at this amount until the end of 2020/21; anything up to this amount is not subject to IHT. Anything above this threshold will incur a tax of 40% unless you leave 10% or more of your wealth to charity (see point six).
There are some things that can ‘increase’ the amount you can pass on without IHT. If you’re passing on your main residence to a direct descendant (children, step-children, or grandchildren), you’ll benefit from an additional allowance of £125,000. If you’re married or in a civil partnership you can also use each other’s unused allowance. In effect, this means your children and grandchildren can receive up to £900,000 without paying tax.
3. Gift assets before death
Gifting your assets before death means you can not only reduce your IHT bill but see your loved ones enjoying your generosity too. Perhaps you have grandchildren struggling to get on the property ladder or you want to treat your children to a lump sum; gifting assets before your death can help your loved ones more than leaving them an inheritance.
However, there are two things to be mindful of when gifting assets. The first is to make sure you will have enough to live on and enjoy your retirement. It’s important to factor in life expectancy, care costs, and remember that circumstances can change. A financial planner can help you understand how taking out a lump sum out of your assets will affect your plans, so contact us today.
The second area you need to consider is the gifting allowance. Each year you can gift £3,000; this is tax-free and will remain tax-free. However, anything above this amount may be subject to IHT if you die within seven years of it being given.
4. Use a trust for assets
Assets that are placed in a trust will not form part of your estate on death and, therefore, will not be liable for IHT. Trusts last until a set of predefined conditions are met, for example, you can create a trust that will become accessible when your grandchild reaches 18, at which point the inheritance will be transferred to them. Trusts allow you to avoid IHT and have control over when the assets will be given.
There are drawbacks to using a trust though. Once a trust has been established, it’s not a simple to take the assets back, which could cause problems if your situation, or that of your loved ones, changes.
5. Hand over property beforehand
For many families, the property you hold is one of the largest assets you’ll want to pass on to loved ones. As a result, it may be subject to a significant IHT bill that they’ll have to find the cash to cover. One option to avoid this is to hand over your property beforehand. However, it’s not just as simple as that.
Firstly, simply handing over property will count as a gift, and therefore the gifting allowance already mentioned needs to be considered. If it’s the home you live in, and want to continue doing so, you need to make considerations here too. Should you gift your home but continue to live in it, the property will be included in your estate when you pass away. You can, however, choose to gift it and then pay rent to continue residing there; this will need to be in line with the market rent and cannot simply be a token amount.
6. Leave a portion of wealth to charity
Leaving a portion of your wealth to charity is an incredible thing to do, but it also comes with potential tax benefits too.
Any wealth that is left to charity is taken out of your estate before the IHT is calculated; it’s not subject to the gifting allowance either. So, if you find that your total estate is crossing over the nil band rate, for example, leaving the excess to charity can take your wealth below the line, meaning that no IHT is due.
Another option is to leave 10% or more to your chosen charities. This can reduce the amount of tax that needs to be paid significantly. Should you decide on this option, your loved ones will pay 36% IHT on the amount over the nil band threshold, rather than the standard 40%.
Discuss your legacy wealth with a professional today by contacting us.