To cover every aspects of tax planning in one short article would be, of course, impossible. Taxes come in all shapes and sizes, one of the most invidious is Inheritance Tax.
If you are a UK citizen and resident, and you are likely to be worth more than £325,000 now or in the future (including inheritances and life insurance and your home), then Inheritance Tax (IHT) is assessed on your entire wealth when you die. Good planning can avoid it entirely – as long as you get started long enough in advance. IHT planning should be part of your general planning from the time you buy your first home – but sadly few people do anything about this and the government takes
The threshold for Inheritance Tax (IHT) has not risen since the 2010/11 tax year, and is currently £325,000 for individuals and, with the option now to transfer any unused threshold to a spouse or civil partner, a total of £650,000 for legally joined couples.
House price rises have meant that in recent years many people have unsuspectingly become liable for IHT.
In the 2015 Budget The Chancellor introduced a new Family Home Allowance in an attempt to protect homeowners. Under the FHA, by 2020 individuals will be able to pass on an additional £175,000 each – £350,000 per married couple or Civil Partners, IHT free against the value of their home on death. The relative level of house prices, however, particularly in the South East, means IHT is still a concern for many homeowners. It is therefore sensible to take some time to consider in advance the potential liability you may be leaving behind.
For most the key contributor to their estate will be the value of their home but, even if this lies below the threshold, there are other elements that can push an estate over the limit. For example, while people typically talk of the benefits of ISA investing, although they shelter investors from capital gains and income tax, they do not shelter the value from IHT. Another example is that any property held abroad also goes towards the value of an estate. Both are therefore susceptible to inheritance tax.
The problem with this tax is not just the fact it has to be paid, but also that it becomes due quite quickly – generally within 6 months. When your home and certain other volatile assets are involved, there is a provision which allows your beneficiaries to pay their liability through instalments whilst they arrange for the home to be sold – but this means that whilst waiting for that sale (or up to ten years, whichever is the shorter), other heirlooms could be compromised as, without planning, some may need to be sold to meet the bills.
However, there are things you can do, particularly if your liability is relatively small. Few people realise that they have an annual exempted amount that they can gift to someone. At £3,000 per year this could go some way to reducing the overall estate. Gifts for weddings, from parents, grandparents and even friends, are also exempt (subject to varying maximum amounts) and there are other useful tools such as loan trusts and discounted gift schemes.
There are exemptions on business assets which also mean that, as long as those assets are held for more than two years, they should be seen as IHT-free. This includes shares in the smaller companies stock market, AIM, although, do note that these stocks can carry a high risk and should not be held purely tax for reasons. Added to this, there are partially-exempt trust structures.
As the Government looks to close potential tax loopholes it is always worth getting advice on what can and cannot be done to ease potential IHT burdens. In the long run, it may help your family preserve some of your family’s most valued possessions, sentimental or otherwise.
Please feel free to call John Ireland on 0208 547 2583 for advice and help – no fee or obligation.