You’ve worked hard to build your wealth; we can help you protect as much of it as possible for the benefit of the next and future generations.
While it’s not a nice thing to need to think about, planning what will happen to your wealth after you die is an essential part of financial planning.
Many people who do not consider themselves traditionally ‘wealthy’ may be surprised to see their potential inheritance tax bill, especially given recent increases in property prices and the fact the level at which inheritance tax becomes payable has barely increased in recent years, and will remain the same until 2019.
Whether it’s making sure your will reflects your wishes, checking that you’re using the allowable exemptions, reviewing your investments to reduce the impact of inheritance tax, or providing for a lump sum on death to meet a potential inheritance tax liability, we can work with you to ensure you have made the right decisions about passing your wealth on to the next generations.
When starting to think about estate planning, two things are very important:
1) Understanding the full value of your assets: this includes your home, other property, savings, investments, retirement savings and insurance policies. Understanding this will allow you to understand the potential impact that inheritance tax could have on your wealth when you die
2) Understand your objectives: what do you want to happen to your assets on your death? Does your will reflect this? Are you prepared to provide regular gifts or give up ownership or control of some of your assets now, with a view to reducing your future inheritance tax bill? Do you want to make sure your wealth is structured in a way that will protect those closest to you, both on your death and into the future?
Inheritance tax – the basics
It’s important to understand how inheritance tax works, especially for couples that are married or in civil partnerships. For example, if you are married you are able to pass everything to a spouse completely free of inheritance tax, in which case your spouse can ‘inherit’ your nil rate band (the amount that can be passed on before inheritance tax is due). The nil rate band for an individual is currently £325,000, meaning that for a married couple, up to £650,000 can be passed on free from inheritance tax.
In addition to the standard nil rate band of £325,000 for an individual, a Residence Nil Rate Band (RNRB) was introduced from 6 April 2017. This is available when residential property is left to direct descendants. The RNRB was introduced at £100,000 (for an individual) and increases by £25,000 each year until it reaches £175,000 in April 2020. Just like the standard nil rate band, any unused RNRB on first death of a married couple can be transferred to the survivor, even if first death occurred before 6 April 2017. There are restrictions associated with the RNRB, such as the definition of ‘residential property’ and for those with estates valued at over £2 million, and so it is important to take relevant legal advice when preparing wills, for example.
Any assets above the nil rate band and, where applicable, the RNRB, that are not exempt (such as certain business or agricultural holdings) are usually subject to inheritance tax at the rate of 40%, although this could be lower if a certain proportion of your estate is left to charity on your death.
Estate planning can take many forms. To begin with, many people should ensure they are using their allowable exemptions.
You are able to give away £3,000 per tax year. This is ignored when it comes to calculating IHT on your estate when you die. As the exemption applies for individuals, married couples can give away up to £6,000 per tax year. In addition, if the annual exemption has not been used for the previous tax year, it is possible to carry this forward, meaning that up to £12,000 can be paid under this annual exemption by a couple who have not used their exemption from the previous year.
On top of the £3,000 annual exemption, you are allowed to make small gifts worth up to £250 per recipient per tax year (not to recipients of the annual exemption). For example, this could be used to provide small gifts to grandchildren, and again is ignored when it comes to calculating IHT on your estate when you die.
Gifts on marriage or civil partnership
Parents can make gifts of £5,000 to their children on marriage or civil partnership. In addition, grandparents can make gifts of £2,500 and anyone else of £1,000 Gifts to registered charities: these are exempt from inheritance tax. In addition, if you leave at least 10% of your estate to a qualifying charity on your death, the rate of inheritance tax that may be payable on your estate is reduced from 40% to 36%.
Tax efficient planning
The effect inheritance tax will have on your estate when you die depends on how you have used the exemptions mentioned above, and how you structure the ownership of your assets during your lifetime.
If you are prepared to make outright gifts during your lifetime, you could do so, although these would only usually be excluded from the calculation of inheritance tax seven years after the gift has been made. Another consideration, is that you would be unable to continue to benefit from the gift. For example, you would be unable to gift your home to your children and continue to life in it rent-free, as such a gift would be ignored for inheritance tax purposes.
Gifting and keeping control
If you decided against outright gifting during your lifetime, you could transfer some of your assets into an appropriate trust. Depending on your objectives and the type of trust used, this could have an effect of immediately reducing your estate for inheritance tax purposes, or doing so after a period of time. You would be able to act as a trustee, thereby keeping a level of control over the investment and use of the trust assets during your lifetime.
If your home is worth more than the nil rate band, or you are simply not prepared to give up any ownership or control of your assets before your death but you have surplus regular income, you could consider taking out an insurance policy which would pay out on your death (whenever that occurred) with the intention of meeting a future inheritance tax liability.
If you’re worried about the possible impact of inheritance tax on your estate, or want to make sure you are making full use of the allowable exemptions, we can advise you on the estate planning approach most suitable for you.
The Financial Conduct Authority does not regulate taxation or trust advice.