ESTATE PLANNING – STARTING EARLY ENOUGH TO MAKE IT WORK!
Inheritance Tax (IHT) is often call a ‘voluntary tax’ and is paid by many families when, for the most part, could have been avoided. If you want to pass on your estate to your loved ones with the minimum amount of IHT payable, you should obtain professional advice. Currently there are a number of generous reliefs relating to IHT and if the correct planning is started early enough, it may be possible to avoid IHT altogether.
THE NEW MAIN RESIDENCE TRANSFERABLE NIL-RATE BAND
From 6th April 2017, there is be a new main residence transferable nil-rate band – the family home allowance. This allowance will apply when a main residence is passed on to a direct descendant, and will be added to the existing nil rate band of Inheritance Tax, which is currently £325,000. Any unused principal residence transferable nil rate band will be transferred to an existing registered civil partner or spouse.
This new allowance increased from 6th April 2017 by an extra £100,000, increasing to £125,000 in 2018/19, £150,000 in 2019/20 and up to £175,000 in 2020/21 and then increasing each year in line with inflation.
So, by 2020/21 an individual will have their own nil rate band of £325,000 plus the main residence nil rate band of an extra £175,000. These nil rate bands are transferable on death to a spouse or registered civil partner which will mean in increased nil rate band on the second death of £500,000 per person – cumulatively £1,000,000.
Organising your affairs well means starting the right planning early enough so that the nil-rate band (family home allowance) will apply when your main residence is passed on to a direct descendant. The main residence transferable nil-rate band works in conjunction with the existing IHT nil-rate band, which is presently £325,000. Any unused main residence transferable nil-rate band is transferred to a surviving spouse or registered civil partner. Non-residential property of the deceased, such as a buy-to-let property, will not qualify.
However, it’s not all good news for those who have estates worth more than £2 million as there is also going to be a tapered withdrawal of the main residence transferable nil-rate band, i.e. the relief is withdrawn by £1 for every £2 the estate exceeds £2m – so for an individual it is lost after £2.35 million (£2.7 million for a surviving spouse). The estate is calculated before reliefs such as Business Property Relief and Agricultural Property Relief.
WHAT IS THE OUTCOME OF THE PROPOSED CHANGES?
Inheritance Tax is controversial. The arrangements you make concerning the protection of your assets can have lasting consequences for you and your family. Currently, IHT is payable at 40% on property, money and possessions above the nil-rate band. You can however, reduce the rate to 36% if 10% or more of the estate is left to charity. Obviously, it is paramount to ensure that your affairs are planned in the most tax-efficient way possible. However, it is not an easy task to keep abreast of the many exemptions and reliefs available. So what’s the answer?
You could consider using lifetime gifts to individuals. These gifts are viewed as Potentially Exempt Transfers – (PETs) and provided the donor survives at least seven years from the date of the gift will not be Included in the estate of the donor on death for IHT.
Trusts can occasionally help you reduce unnecessary tax charges, allowing the maximum possible part of your family’s wealth to be preserved. You wish to consider transferring part of your wealth to a member of the family but still retain control; our specialists can advise on setting up trusts and can take care of all the administration.
A very important way to minimise IHT is to make a Will, so as to reduce the tax costs and leave your family with the maximum assets.
BUSINESS AND CORPORATE STRUCTURES
If you are a business owner, it is also imperative to examine the structure of your business when arranging your affairs. Changing the structure of a business can have significant tax implications.
Some assets are treated more favourably for IHT than others. For example, business assets as well as share in unquoted companies as well as works of art benefit from special concessions which can help when passing on wealth from one generation to the next.
ARE YOUR NEEDS FULLY CONSIDERED?
If you don’t have the right advice and financial planning, HM Revenue & Customs could turn into the single largest beneficiary of your estate when you die, for many people that’s enough reason to obtain professional financial advice to ensure your needs are fully considered.
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