Do you know how inheritance tax will impact your loved ones?
Talking about inheritance can be difficult. Daniel Craig has both ‘shaken’ and ‘stirred’ the debate in the past, stating that he’ll be spending or giving away most of his fortune, rather than leaving it to his children. It’s an interesting point of view, which is made easier if you’re lucky enough to be sitting on an enormous amount of wealth.
While we won’t all be lucky enough to amass a similar fortune to 007, it doesn’t necessarily mean we’ll avoid the issue of inheritance tax (IHT) when passing on our wealth. It may seem that IHT impacts relatively few, but with the current threshold of £325,000 frozen until 2025/26 it has become what many commentators describe as a stealth tax. Indeed, according to HM Revenue and Customs the government received £718.2 billion in IHT between April 2021 to March 2022, which is £133.8 billion higher than in the same period a year earlier*.
IHT is usually levied on the value of all the assets of your estate when you die, after deducting any liabilities, exemptions, and reliefs. Assets left to a spouse or civil partner of the deceased are usually exempt, as are assets left to a charity. However, with some astute planning, it’s possible to both ethically and responsibly reduce, or mitigate, the impact of IHT, meaning that more of the wealth you’ve worked hard to accumulate is passed to the people who you think deserve it most.
5 things to think about
There are several things you can do to mitigate what you might be currently on course to pay but here are five key things to think about:
- Make sure you have a will – this is fundamental. It’s essential that you have an up-to-date will as it’s one of the most important things you can do to ensure your estate goes to who you want
- Gift some of your wealth now – many people leave it too late to pass on their wealth. It can be more tax-efficient in relation to IHT to gift money while you are still alive, plus you have the chance to see how those gifts can transform the lives of your family. Anything you give away more than seven years before your death is exempt from IHT. You can give away up to £3,000 each year IHT-free and small gifts of up to £250 per person are exempt. You could make larger, regular gifts, tax free, but these must be from income and you must demonstrate that they do not impact your standard of living
- Use your pensions – Not everyone realises that pensions are one of the most tax-efficient ways to pass on your wealth. If you die before the age of 75, benefits left in a money purchase pension can be paid as a lump sum or drawdown income to any beneficiary, with absolutely no tax to pay. After the age of 75 they will be taxed at the beneficiaries’ marginal income tax rate
- Consider trusts – trusts can help reduce an IHT bill and give you control over how your assets are used by future generations. Some trust structures let you leave money without it being subject to IHT. However, the rules around this vary widely for different structures, so you should seek advice on how this could work for you
- Check your life assurance – you can use life assurance to either meet or reduce a prospective IHT bill. If it’s written in trust, the proceeds of the life assurance policy won’t be included in your estate. When you die the policy pays out to the trust which pays all or part of the inheritance tax bill.
IHT is complex
Making a plan and adapting it to meet your changing circumstances can help you make sure you don’t miss out on valuable tax allowances. IHT is a complex subject, which is why taking expert advice can help you make sure your estate goes to those you really want it to.
Article provided by Citrus Financial. For help with understanding how inheritance tax will impact your loved ones, contact them today on 01732 834834 or email [email protected]
The value of pensions and investments can fall as well as rise. You may get back less than you invested.
Tax treatment varies according to individual circumstances and is subject to change.
Inheritance Tax Planning, Wills and trusts are not regulated by the Financial Conduct Authority.
*HMRC tax receipts and National Insurance contributions for the UK (Monthly Bulletin) Updated 26 April 2022
Author: Helen Loder
Co-Director of Sevenoaks Mums