Each new year brings all of us the opportunity to examine our future plans for what will be necessary for our future needs in financial and wealth planning. As we go over our assets and liabilities, we need to be aware of the Inheritance Tax (IHT), and what it might mean to our beneficiaries and our estate.
The IHT has had many changes and modifications over the past several years, and many families are unaware of the potential benefits that they can receive by conducting some simple financial planning for the IHT. By reviewing your current and potential future financial situation, even families with moderate to high levels of wealth in savings, pensions, and land ownership could protect themselves from a big IHT hit.
From the 2015 to 2021, the ordinary nil rate band will hold steady at £325,000. In addition to this rate, the potential passing of a family home has been affected by rule changes in the Summer Budget of last year. The new changes created a situation where property that at any time in the life of the deceased was a primary residence will be subject to a new residence nil rate band. The band will be £100,000 for deaths occurring after 5 April 2017, and the band increases to £175,000 for deaths occurring after 5 April 2020.
If any potential tax shelters are unused, then they will be available for use by the spouse or civil partner resulting in the potential value of IHT exemptions £1m from 6 April 2020 for a couple. A major drawback is that estates with an assessed value in excess of £2.2m will not be eligible for any benefits under the new rule changes. The full 40% liability of the IHT will be assessed on these estates.
Reduce Your IHT
By committing to several smaller steps over a wide range of years, you can improve your results and liabilities in regards to the IHT tax that will be paid upon your death. One way to help lessen the eventual tax burden is to make sure that every available allowance, exemption and relief is being used. These are placed in the tax code for your benefit, so make sure you use them.
One way to lessen your eventual IHT burden is to gift your assets over your lifetime. After seven years, these gifts will no longer be eligible to be taxed under the guidelines of the IHT if there is no benefit gained from the gift of assets.
There are several other forms of gifting that have IHT benefits. One is the annual gift exemption which stands at £3,000. If no gifts were made in the previous year, then the allowance is £6,000. One kind of gift that can be eligible for use as an allowance is the small gift of £250 per beneficiary. Another is the marriage gift where you can give children up to £5,000, grandchildren £2,500, and £1,000 to anyone else getting married. If you look, there are many different tax allowances that can be found.
Using Surplus Income
Do you have extra income just lying around, and you don’t know what to do with it? There is a way to make gifts out this additional income, and you can avoid the IHT as these gifts are not subject to taxation even if you pass away within seven years.
Inheritance Tax and Gifts
With the Prime Minister making changes to estate taxation, the implications of the Inheritance Tax are on most peoples’ minds. The government estimates that receipts focused on IHT will increase from £4.6bn in recent years to £5.6bn in 2020-2021. It is estimated however from research that only 14% of taxable persons are aware of correct IHT thresholds that affect all of us.
According to Octopus CEO, Simon Rogerson, 21% of households with a family income over £50,000 are spending to reduce their IHT tax liability, and 4% of households over the age of 60 reduce their IHT liability through using investments that are shelters from IHT. Despite all of the talk about IHT, very few people make future financial plans with IHT in mind.
According to the HMRC, the Inheritance Tax is used when a person’s estate is worth more than £325,000 at the time of death. This rate is for the years 2016/2017 with the estate consisting of a person’s property, money, investments, and possessions. Estates valued over £325,000 are taxed 40% in accordance with IHT. If 10% or more of the estate is left to charity, then the IHT rate is reduced to 36% of the estate’s value.
If married and civil partners live permanently in the UK, then they have the option to transfer funds tax free to each other. This means that when one dies, then the allowance for the remaining spouse or partner can double to £650,000. This increase would allow most to escape the IHT entirely.
Other ways to limit or avoid the IHT completely is through the use of tax reliefs such as the agriculture relief, a heritage asset, or the woodland relief. The use of any of these reliefs can be verified through contacting the HMRC.
Military service can also be a tax relief for the deceased’s estate. If the death occurred while on active service or active service contributed to the death of the person in question, then the estate of the deceased is exempt from IHT as well.