Reducing your family's inheritance tax bill
Let us help you find the right wealth structure or combination of structures
Inheritance tax (IHT) doesn’t only affect the very wealthy. Rising property prices over the past few decades have meant it’s now an issue for an increasing number of people in the UK. So what steps can you take to ensure that your money goes to your loved ones and not to the taxman?
Give your family lasting benefits
The structures into which you can transfer your assets can have lasting consequences for you and your family and it is crucial that you choose the right ones. The right structures can protect assets and give your family lasting benefits in an uncertain world.
IHT is a tax on your estate – the things that belong to you – when you die and is also sometimes payable on trusts or gifts made during your lifetime. Your estate includes the total of everything you own and a share of anything you own jointly. With appropriate planning you may be able to reduce the bill or avoid IHT altogether.
For the current 2012/13 tax year, no IHT is charged on the value of your estate up to £325,000. This is known as the ‘nil rate band’ and everything above that is taxed at 40 per cent.
Things that might count towards your estate include:
- Payment from a pension plan or employee death benefit
- Other assets, for example, cars, art, jewellery, furniture
- Gifts you have made but still benefit from, for example, a house you have given away but still live
- Certain gifts that you have made in the last seven years
- Assets held in trust from which you receive personal benefit
- If you own assets jointly, your share of their value is included in your estate
If an individual’s IHT nil rate band is not used up on their death, the unused proportion can be transferred to their surviving spouse or registered civil partner. Assets passed between spouses or registered civil partners are exempt from IHT (assuming they are domiciled in the UK), regardless of their worth and how soon you die after making them. These rules also apply to gifts made to charities.
Additionally, any amount of money you give away outright will not be counted for IHT if you survive for seven years after making the gift. If you die within this period, the amount of the gift will be included within your estate. Taper relief may apply in these circumstances and could reduce the amount of IHT due.
Bear in mind tax laws are subject to change, possibly retrospectively. Also, the rules for individuals who are not UK resident or not UK domiciled are different and therefore tax and local laws should be considered by a potential investor.
Planning for inheritance tax
There are a number of options that could, if appropriate, potentially reduce your family’s IHT bill.
Make a will – an effective will could help reduce an IHT bill
Look into exemptions – there are a number of exemptions you can use to reduce the value of your estate. For example, moving assets between spouses or registered civil partners does not create an IHT liability
Consider gifts – if you can afford to give away some of the assets you own, it may be possible to reduce the size of your estate
Think about life assurance – a life assurance plan written in an appropriate trust won’t actually lessen the IHT bill but the proceeds could be used to help pay the bill on death
Consider trusts – if structured carefully, trusts can help to reduce or even eliminate an IHT liability.
Levels and bases of and reliefs from taxation are subject to legislative change and their value depends on the individual circumstances of the investor. The Financial Services Authority does not regulate estate planning, wills or trusts.