How to keep your wealth in the family

Are you worried about leaving an inheritance to your loved ones and then having them pay tax on your legacy? No one likes to think about a time when they won’t be here, but the reality is that unfortunately some people aren’t prepared financially. Fairstone independent financial adviser Andy Fell looks at how IHT planning can help you to preserve your legacy.

In 1986, former Labour MP and Chancellor of the Exchequer Roy Jenkins said that Inheritance Tax (IHT) is ‘a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue’.

Times have changed since then, and with careful financial planning you can save tax and retain some control over your assets, both during your lifetime and after death. During my time as a financial advisor over the years, I estimate the savings in IHT for my clients to run into millions, not thousands, yet the number of people being caught by IHT is ever increasing.

More than £5 billion was paid to the Treasury in socalled ‘death taxes’ in the last tax year, as property values continue to push thousands of Britons into IHT territory. Added to this, it is estimated that £5.5 trillion of assets  will be transferred through generations the next 30 years.

Estates that pass on to a spouse, registered civil partner or charities are exempt from IHT, even if the value of such estates is higher than the threshold limits. Estates that pass on to anyone else, including siblings, children and grandchildren, attract IHT.

Deciding on the best way to leave your estate

If your estate is likely to suffer IHT, there are accessible solutions and strategies we can discuss with you to mitigate this tax. You may find the idea of discussing inheritance uncomfortable, but with proper IHT planning, it could save your family hundreds of thousands of pounds. This is about deciding on the best way to leave your estate to those you love after you die, and to help ensure your loved ones are provided for.

When you die, the Government charges tax on your estate – and it could be a pretty significant amount. IHT is payable at 40% on assets within your estate that exceed the nil-rate band threshold (currently at £325,000) and is payable on assets that are passed on when you die. Nearly everyone has an estate, no matter how big or small it may be. This will include your property and business, cash and investments, cars, jewellery, art, and proceeds from life insurance policies not written in an appropriate trust.

Transfer to a surviving spouse or registered civil partner

An additional nil-rate band is available for individuals on their main residence if it is passed on to a direct descendant. Direct descendants include children (including stepchildren, adopted children or foster children) or grandchildren. This additional IHT-free residence nil-rate band is set at £150,000 in the 2019/20 tax year and will increase to £175,000 from 6 April 2020. As with the existing nil-rate band, any unused additional nil-rate band can be transferred to a surviving spouse or registered civil partner.

More tax-efficient for IHT purposes to gift money

The residence nil-rate band is available on top of the existing IHT nil-rate band of £325,000, so that in 2020/21 an individual will potentially be able to leave £500,000 free of IHT. As is now the case with the standard nil-rate band, where the first of a married couple to die leaves their estate to their spouse, the residence nil-rate band can effectively be ‘passed on’ to the surviving spouse.

While few of us enjoy talking about our eventual demise, not having a Will can result in assets passing to the wrong person or in a way that gives rise to a larger IHT bill. That’s why it’s equally important to keep any Will up to date. Tax rules and rates are always changing, and it is crucial to make the most of any new opportunities and to avoid any pitfalls. However, it can be more tax-efficient for IHT purposes to gift money while you are still alive.

Transformative effect on both yours and your family’s life

Transferring wealth while you are alive can have a transformative effect on both yours and your family’s life. Gifting money to a younger relative to top up their pension and an Individual Savings Account can substantially boost their income when they eventually retire.

Each year, you can give away £3,000, and that gift will not be subject to IHT. You can also give £250 to any number of people each year. Parents can give £5,000 to each of their children as a wedding gift. Grandparents can give £2,500, and anyone else £1,000.

The full benefit of it being outside of your estate

Gifts of any size to charities or political parties are also IHT-free. If a gift is regular, comes out of your income and does not affect your standard of living, any amount of money can be given away and ignored for IHT.

It is also possible to make further tax-free gifts (‘potentially exempt transfers’), but you have to survive for seven years after making the gift to get the full benefit of it being outside of your estate for IHT purposes.

Taking a significant amount of wealth out of your estate

If you pass away within seven years and the gifts are valued at more than the nil-rate band, taper relief will be applied. The tax reduces on a sliding scale if the gift was made between three and seven years earlier.

Many people think that IHT only concerns the very wealthy, but property prices are such that the value of your property alone can easily exceed the tax threshold. Don’t forget, IHT can take a significant amount of wealth out of your estate, making a big difference to the amount your heirs receive when you are gone.

How can I be sure my wealth will reach the right people?

First and foremost, IHT planning will help ensure your family are provided for and your loved ones are taken care of. It also means you can choose where your estate goes so there will be no confusion about your wishes. Professional IHT planning can also help minimise the amount of tax paid, so you can leave more to your loved ones. To discuss your concerns, please contact us.

Information is based on our current understanding of taxation legislation and regulations.

Any levels and bases of, and reliefs from, taxation are subject to change.

The rules around inheritance tax are complicated, so you should always obtain professional advice.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested.

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For further information, please contact:
Andrea Barker
/ Tel. +44 (0) 191 519 6243