Keeping It In The Family – Inheritance Tax
Keeping It In The Family - Inheritance Tax
Introduction
The death or inheritance tax is not a pleasant topic to discuss. However it's important to be aware of the rules around inheritance and how they affect you. If you're lucky enough to have accumulated wealth over the years, here's what you need to know about passing that wealth on to your children and grandchildren—and avoid having it eaten up by His Majesty's Government.
What is Inheritance Tax?
Inheritance tax is a tax on the value of assets left by someone who has died. It is payable by the beneficiary of the estate (the person who inherits), not the deceased. The amount owed depends on two factors:
- The value of the estate you inherit
- Your relationship to the deceased
The Rules
The rules are fairly simple:
- If you die with a net estate worth more than your nil-rate band (currently £325,000), you’ll pay 40% Inheritance Tax on the portion of your estate that falls above this. For example: your estate is worth £550,000 and includes £325,000 in assets and £175,000 in property. This would be taxed at 50% on its remaining amount (£50k). As long as you don’t exceed the nil-rate band, things should be fine – but if there are any inheritance tax liabilities when you pass away without having made adequate provisions for them in your Will, then it could cause serious problems for your loved ones.
How Much Can I Leave Tax Free?
If you're leaving your assets to your family and other beneficiaries, how much inheritance tax you pay depends on a number of factors. The first is the value of your estate when it comes to calculating inheritance tax. Your estate includes assets such as property, investments and any other possessions that aren't owned by someone else (such as loans).
The second factor is how much you leave to your spouse or civil partner and how much you leave to others. No IHT is due on money / assets left to a partner until they also die. At this point they can use their own and your allowance of £325,000 each (known as nil rate band). The third factor is how much you leave to children.
What is the Residence Nil Rate Band?
So, what is the Residence Nil Rate Band? The Residence Nil Rate Band is a way of reducing your inheritance tax bill by passing on assets to your children or grandchildren. It allows you to pass on a certain amount of property to your heirs without those assets being subject to inheritance tax. This is in addition to the sums above. The RNRB is currently £175,000 or £350,000 if a couple (married or civil partnership).
Pass Some of it on to Charity
The charity you choose should be one that is close to your heart or the life experiences of your family.
You can donate money, goods, or even property. If you are not certain how best to pass on an item, contact the tax office or your financial advisor/solicitor for guidance on inheritance tax.
Charities are exempt from inheritance tax. They may also claim relief on donations made by individuals or companies (up to 30% of their taxable profits) as long as they are registered with HMRC. They also need to meet certain criteria. This includes:
1) The charity must be set up for charitable purposes only;
2) The charity's activities must benefit more than just their members;
3) There must have been no other reason than personal gain behind setting up the charity
4) The trustees must have very little influence over what else happens within the organisation
It's possible to significantly reduce the amount of IHT you'll pay by taking some steps now.
The first thing to do is make a will. If you don't have one, then under current laws your estate will be distributed according to the intestacy rules. This means that your assets would be split among your relatives according to your relationship with them and their relationship with each other. Did you know that around 60% of people in the UK do NOT have a will. And this is nonsensical. It is a fairly simple and straightforward process to set up a will. Not having a will leaves everything open to chance and people who you do not wish to inherit (for example a partner you have separated from but not yet divorced) could end up with everything.
Consider whether there are any trusts that might help reduce the amount of inheritance tax (IHT) paid on your estate. A trust can be an efficient way of managing investment assets for young people or individuals who are likely not to benefit from immediate access to their wealth but still want to benefit from its growth over time.
If you're married, then it may also make sense for your partner or spouse to benefit from their share of the trust rather than directly from the rest of your estate when you die. This could save up to 40% in IHT by reducing the size of the deceased person's estate before applying IHT rates.*
Conclusion
So, there you have it! The the best way to avoid paying unnecessary amounts of inheritance tax is to take action now. Avoiding Inheritance Tax is a complex area of law. If you have any questions please contact a specialist adviser who can help guide you through this process.
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