In the 2016-17 tax year HMRC received a staggering £4.9 billion in Inheritance Tax receipts. It’s predicted that the figure for the current tax year could reach a new high.
The introduction of the new residence nil-rate band (in stages) from 6 April 2017, enables homeowners to pass on more wealth to their direct descendants. Although, this provides some additional relief, the Inheritance Tax (IHT) threshold has controversially been fixed at £325,000 for eight years. Meanwhile, stockmarket investments, inflation and crucially house prices, have continued to rise, meaning that more families than ever before have found themselves liable to IHT.
But by planning ahead it’s possible to reduce the amount of tax payable by your loved ones on your death and we have outlined a number of areas that clients may wish to consider:
Make use of your annual exemptions
- Each financial year you can make gifts of up £3,000 (in total not per recipient). If you don’t use this in one tax year, you can carry it over for one tax year, which means you could give away £6,000.
- Small gifts, of £250 per recipient per tax year to any number of people are exempt, as long as you haven’t used another exemption on the same person
- Each parent of a bride or groom can give up to £5,000; grandparents can give up to £2,500 and any other person £1,000.
- Making gifts out of normal expenditure. This can be a complex area and you will need to meet strict criteria in order for them to qualify as being exempt.
- Gifts to registered charities and political parties are also exempt.
Trusts can play a very important role in estate planning, particularly where you are considering substantial outright gifts. There are also a number of Trust-based arrangements where you can make IHT efficient gifts but still retain some access to all or part of the capital.
Write a Will
Dying without a valid will (‘intestate’) can give rise to serious problems for those you leave behind. If the rules of intestacy are applied to your estate, some of your family members may not receive any financial provision.
By having a suitable will you are reassured that your family and dependants will benefit from your estate, in accordance with your wishes. It’s important to obtain professional advice to make sure you have a will that properly reflects your wishes and makes the necessary provision for your whole family. If you already have a will, it’s worth reviewing it regularly to ensure it reflects your current position and most certainly review your will at the time of any major life event .
If you don’t want to give away your assets while still alive, another option is to take out life cover. This cover won’t reduce the amount of IHT due, but can pay out an amount equal to your estimated IHT liability on death, allowing your surviving family to pay the IHT bill.
This type of arrangement can also be used to cover the tax liability that may arise on a Potentially Exempt Transfer (PET) should the donor die within the first seven years of the gift.
Many people are put off IHT planning as it can be complicated and no one likes to think about their own death. Every family is different and circumstances vary but with a little financial planning now and working closely with your solicitor and accountant you can ensure that those closest to you obtain the full level of inheritance you wish for them.
Our Lifestyle Financial Planning Service has proven very useful for IHT planning, as it uses cash flow modelling to show how making gifts might impact upon your financial position now and in the future.
For more information on our cash flow modelling service and giving money away in a tax-efficient manner please contact Peter or Nick.
t. 01483 508580