How to reduce your IHT liabilities and leave more to your beneficiaries
We pay tax all our adult lives in one way or another: tax on our income, tax on our spending, National Insurance, stamp duty, excise duties – the list can feel endless as our hard-earned money goes to at least three different levels of government. And then another tax when we die!
In part 1 of a series of 3 videos, Veronica Mann, Chartered Financial Planner, indicates some simple things you can do so that your estate pays less inheritance tax, pays less to the revenue and more goes to your loved ones/ chosen beneficiaries.
Broadly, IHT is a voluntary tax* currently only payable if the value of your estate, property, money and possessions is over £325,000. There is an additional allowance (Residential Nil rate band) to help the owners of more valuable homes.
There are ways to minimise the IHT impact or mitigate it altogether, such as moving money outside of your estate (e.g. writing it into trust), or into certain types of investments, giving some of it away, or even just spending it! Although you must always make certain that you have enough for yourself to live on.
For some ideas to tackle Inheritance tax see below and watch these helpful videos to explain further: Ensure my loved ones get more of my assets. , Using investments and prefunding and save inheritance tax and income tax using an ISA.
Talis have many years’ experience navigating the convoluted rules and regulations surrounding inheritance tax and there’s probably no scenario we haven’t seen. Most people we speak to do not want their money to go to the Exchequer after their death. We have many solutions available to reduce the impact of IHT on your estate and although it may be a difficult subject, we encourage you to speak to us at the earliest opportunity. This is even more important if you’re facing a major life event such as bereavement or divorce.
For more information and a confidential chat, please contact us.
*Roy Jenkins, the former Labour chancellor, once described inheritance tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue.”
The jargon can be confusing too – so here is a glossary to help.
Make a plan
Adding up the value of your savings, investments, property and personal possessions. Do not forget individual savings accounts (ISAs) – though tax-free during your lifetime – they form part of your estate for IHT. AIM ISAs are different! Finally, take off the value of any debts. If the total adds up to more than £325,000, then IHT could apply.
Review your Investments
Some investments are given favourable treatment for IHT purposes, eg AIM ISAs
Specialist advice from an adviser and a solicitor is essential for anyone considering setting up trusts.
Use all of your IHT allowances
Write a will
A will makes your wishes concrete and clarifies who should get what. It will stop any assets being divided under the rules of intestacy, where even spouses are not guaranteed to inherit everything. A will forms an essential part of your personal inheritance tax planning.
Minimise your estate
You cannot be taxed on money is not yours. So ensure that as much as possible is outside your estate including any associated with work. Consider amending someone’s will after death. You might be able to apply for a deed of variation. Watch this helpful video for further explanation from Veronica Mann.
Anything you pass on to a spouse is free of inheritance tax. The same concession applies to same-sex couples who register under civil partnership laws. However, legacies between unmarried couples are not tax free – a serious problem when a couple jointly own their home. This can lead to people having to pay an IHT bill just to continue living in their home.
Think about your home
For many families, their homes are their biggest asset – and their biggest inheritance tax headache. The Government has clamped down on schemes to get around the ‘gifts with reservation’ rules. Most couples who own a home together are joint tenants. This means that if one person dies, the other automatically becomes the outright owner of the property. The alternative is to register as ‘tenants in common’, each owning half the property absolutely. This means that on death, your share may be left to someone else to keep down the size of your estate.
Nil Rate Band
In 2015 the government introduced the main residence nil-rate band. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner. There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold. The existing nil-rate band will remain at £325,000 until the end of 2026.
Using an ISA
Watch this video where Veronica Mann explains how you can save inheritance tax and income tax using an ISA.
Do not lose sight of whose money it is in the first place. If you are worried your wealth is simply building up a tax bill, then throw off the shackles and enjoy yourself.