Inheritance Tax Planning Advice

Estate planning, or IHT planning, is essential to make sure that your estate passes on to your family, friends and other beneficiaries after your death in the way you have planned and in the most tax-efficient way possible.

To put it simply, inheritance tax planning is the tax-efficient distribution of your assets after your death.

If your total assets are over the inheritance tax threshold (IHT), your family/friends might have to pay a bill after your death. But, IHT can help you keep that bill to a minimum.

In the planning process, you’ll decide who you want your beneficiaries to be, when you want them to receive help and how you can help keep their inheritance tax to a minimum. You might also talk about wider planning, such as pension planning, financial planning and investments.

 

Your Estate and Inheritance Tax: Key Terms

  • Your estate: This is everything you own. Your home, your property and your savings are all part of your estate.
  • Inheritance tax IHT: This is what your beneficiaries might have to pay if your estate value is over a certain number. Currently, that figure is £325,000. That means anything over the £325,000 figure will be taxed at 40%.
  • Probate: This is the legal right to deal with someone’s property, money and possessions (their estate) after they die.
  • Residential Nil rate band: This is an extra IHT allowance. It is set at £175,000, and it tops up your existing £325,000 when you pass on a ‘primary residence’ to children or grandchildren. This means one couple could leave as much as £1 million of assets, tax-free for their children, as long as those assets include the family home.
  • Gifts: Any gift made more than 7 years before your death is exempt from IHT. But you must be able to prove that it is an outright gift.

Estate Planning: An Example

Let’s assume you leave:

£90,000 worth of savings, investments and possessions.

Your main residence, which is worth £375,000.

This would mean the total value of your estate is £465,000.

Now, if you had left this amount just in savings, it would exceed the inheritance tax threshold and your beneficiaries would have to pay 40% tax on £140,000.

However, because you left your main residence as part of the estate, you benefit from the Residential Nil Rate band. This tops up the inheritance tax rate threshold to £500,000. Your £465,000 estate is below this, so your beneficiaries have no inheritance tax to pay.

Furthermore, because you have £35,000 of your nil rate band unused, this can be added to your surviving spouse or civil partner’s estate. Deleted this

When is Inheritance Tax Paid?

Inheritance tax must be paid within 6 months of the deceased dying, and interest is charged on late payments. The tax must be paid before the beneficiaries receive the assets, which presents a bit of a problem.

There are a few solutions for this, though.

  • If there is enough cash in the estate to settle the inheritance tax bill, the executor of the will can make a payment from the estate directly to HMRC.
  • If there isn’t enough cash, a loan can be arranged, and HMRC can be paid with this money. The loan can then be repaid when the estate is released.
  • If some of the estate is property, IHT can be paid off in instalments over as many as 10 years.

Instructing professional financial advice will help you manage your liabilities and deadlines in a tax-efficient way.

Some Exemptions

There are exemptions to inheritance tax; these are transfers you can make at any time without incurring inheritance tax. Some exempt transfers you can make use of are:

  • Gifts of any value between spouses or partners.
  • Annual gifts of up to £3,000 in each tax year.
  • Wedding gifts or civil partnership gifts. You can give £5,000 to your children.
  • Gifts to charities, political parties or national organisations. Charity donations are tax free during your lifetime and when you leave money in your will too.

IHT advisors can help you make use of exemptions in the right way.

IHT Wealth Management with Beaumont Wealth

Solutions to inheritance tax mitigation can include trust planning and the use of reliefs, gifts and allowances permissible by HMRC. For any of these solutions to be effective, they must be planned carefully and they must abide by HMRC rules. For example, for an outright gift to be exempt from inheritance tax, it needs to be given 7 years before death. This requires careful planning to make sure you are not left short in later life by any gifts you make.

IHT planning is a complex area of financial planning, so you should instruct an IHT wealth management service. Your adviser will discuss IHT planning/mitigation, and they will advise on how this can be achieved whilst still meeting your other financial planning objectives.

Our team of experienced financial advisers will work closely with you to understand your unique financial position. Our IHT advisors will then determine the likely value of your IHT bill. They will also discuss your beneficiaries and how you would like your estate to be controlled. Then, they will start to make a tailored plan to prevent the tax man from being your biggest beneficiary!

FAQs

Who is liable for inheritance tax?

As the estate owner, you do not pay the IHT. The beneficiaries are the ones responsible. Specifically, the Executor/Administrator of your estate. Your beneficiaries and Exec/Admin could be the same person, or they could be different, depending on how your will is set up.

How is it paid?

Paying the bill can be stressful during an already stressful time. It is a little complicated, too, as the bill is due before the money is released. Here are a few ways the bill can be paid:

  • Using your already existing funds/savings
  • Using a loan
  • Paying from the deceased account
  • Taking out an IHT loan
  • Paying in instalments

Can everyone benefit from the Residence Nil Rate Band?

No, there are a few stipulations. Your home must be part of the estate. The total value of your home must be under £2 million. You must have left your home to your ‘direct descendants’.

Isn’t the 40% tax bill only for high earners?

When talking about income tax, yes. However, with inheritance tax, it is a 40% flat rate no matter how much your beneficiaries earn.

Is life insurance subject to inheritance tax?

It depends on how the insurance policy is set up. Sometimes, the policy can be included in the estate unless it has been placed in a trust.

Can I give away my home and keep living in it?

Some measures prevent this. An individual cannot give away an asset and then continue to benefit from it. So, you can’t give away your property early to avoid IHT.

When should I start IHT planning?

There is no magic number. Starting too early might not be worthwhile, especially if you haven’t accumulated many assets yet. Likewise, starting too late can put unnecessary time constraints on the process. The best course of action is to talk to IHT advisors to get their opinion on when is the right time for you to start thinking about inheritance tax advice.

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