We know you work hard to provide for your loved ones and so it is equally important to make sure that after you are gone, they continue to be looked after and benefit from what you have left for them. Making sure you plan ahead in terms of Inheritance Tax Planning is essential to help them receive what was intended for them.
The standard Inheritance Tax allowance per person is currently £325,000. With the average home in England and Wales now being valued at £300,000*, according to Rightmove, this can soon be eaten up. The allowance may increase to £650,000 if the first person dies in a marriage or civil partnership, and leaves everything to a spouse or partner, as the personal allowance of £325,000 is passed on.
From 2017 the new family home allowance may also help children and grandchildren but still excludes other beneficiaries. There will be an additional nil-rate band for the main residence on top of the normal allowance. The maximum amount available will be phased in as follows:
£100,000 for 2017 to 2018
£125,000 for 2018 to 2019
£150,000 for 2019 to 2020
£175,000 for 2020 to 2021
However, it still may mean that your children or beneficiaries are faced with payments before they can benefit from your estate. So how can you make sure your wealth is passed on?
Utilising gifts is an option for passing on wealth;
- You can pass gifts to your spouse or civil partner at any time and for anything you own, free of tax.
- You can give gifts of up to £3000 a year or £6000 if you are a couple to other people, also free of tax, per year. If you miss a year, the allowance can be combined with the following year but for that year only.
- You can give gifts of £5000 to children when they get married, £2,500 to grandchildren and up to £1000 to anyone else.
- You can give a gift of £2,500 to your bridegroom, bride or civil partner.
- You can give gifts of up to £250 multiple times to a number of recipients at for example birthdays and Christmas.
A gift must be something that you no longer get any benefit from. Providing you survive for 7 years after the gifts have been given, they can pass to the beneficiary without being classed a part of your estate and potentially with less or no tax to be paid. If you die within 7 years, tax is applied proportionally based on the number of years that have passed and is then due from the beneficiary or from your estate if they cannot pay.
You could also set up a trust, which again is not usually counted as part of your estate for IHT purposes. Cash, investments and property can be left in trust to the beneficiary. The trustee looks after the trust according to your wishes so it may be to only release the trust when the person reaches a certain age for example. Trustees can also resolve disputes and decide on the best course of action at the time. Circumstances change all the while and so the trustee can make the decision based upon your wishes. If you want your money to stay within your bloodline this can be specified, avoiding impact from divorce or remarriage.
It’s important to remember that you no longer own what you put in trust. Life Policies can also be placed in trust so that their sum passes straight to the beneficiary rather than being classed as part of the estate.
Trusts like gifts must have been set up 7 years prior to death to reduce Inheritance Tax. Currently, if the total money transferred in trust or gifts is valued at less than the nil-rate band which is currently £325,000 and has been set up for longer than 7 years, then there is no tax due. If it is more than the nil-rate band (£325,000 assuming all of the nil-rate band is available) the trustees would pay 20%. If it has been set up less than 7 years, then 40% tax could be payable. However, there are many types of trusts and some IHT liability can be incurred and differ with circumstances, so it is best to get independent financial advice when setting up a trust.
Everyone’s circumstances are different and so we recommend you get independent financial advice for any kind of estate planning including gifts and trusts. Call us on 0333 456 0333 or email email@example.com to arrange a consultation. We will help you to work out what actions are required to ensure your loved ones receive and keep what was intended for them.