Inheritance Tax. The most hated tax of all!

How can you beat it?

At its simplest, inheritance tax (IHT) is the tax payable on your estate when you die if the value of your estate exceeds a certain amount, the current threshold is £325,000. Effective inheritance tax planning could save your beneficiaries thousands of pounds, maybe even hundreds of thousands depending on the size of your estate.

There is a tendency for individuals to avoid thinking about IHT and the inevitable circumstances that make it relevant, however, individuals ought to make themselves aware of a number of changes to IHT announced over the past 18 months that have significant impact on the IHT regime.

The number of Britons paying IHT is expected to rise considerably over the next five years according to official statistics published alongside the Budget. Inheritance tax paid to the government in the tax year 2015/16 was estimated at over £4bn from 40,000 estates, rising to around £6bn from 60,000 estates by 2020/21.

According to Mark O’Neill, a Director at Jones Harris Chartered Financial Planners, this should act as a reminder to those whose total assets risk exceeding the threshold of the perfectly legitimate ways to limit the impact of death duties on their family.

Mark examines what can be done…

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 thus reducing the inheritance tax bill.

Gifting is perhaps the most popular way to reduce your IHT liability. You can make gifts worth £3,000, free of IHT, to children or grandchildren each year. You can also make larger gifts, but the catch is that you need to survive for seven years for these to completely move out of your estate. While gifting mitigates some of the effects of death duty, it doesn’t always give you the scope to completely wipe out an IHT liability.

Don’t forget pensions

Recent reforms to the way pension benefits can be paid out to loved ones; have opened new estate planning opportunities. Furthermore, they have changed the way many investors are using and designating their funds in retirement.

Funds can be passed on tax free if the holder dies before the age of 75, but are taxable at the beneficiary’s marginal rate if the investor is 75 or older when they die.

New pension policies typically offer a choice for these “death benefits” to be paid as a lump sum, or via a drawdown account (where the beneficiary can take cash as and when they prefer).

However, most policies drawn up before pension freedoms came into force in 2015 offer death benefits to be paid solely as a lump sum. This potentially exposes the beneficiary to a tax charge which could wipe out nearly half of the fund, or an annuity.

In light of the changes, those who have the financial means are starting to ring-fence their pension so they can pass it on to the next generation – potentially free of tax – while using other assets to fund retirement.

Think about life assurance

A life assurance plan written in an appropriate trust won’t actually lessen the inheritance tax bill but the proceeds could be used to help pay the bill on death.

Consider trusts

When you put money or property in a trust, you don’t own it any longer – so it may not count towards your Inheritance Tax bill when you die. There are several types of trusts and trust law is complicated. To make sure you get things right, it’s vital to get professional advice before setting up a trust.

What to do next?

Without proper tax planning, many people could end up leaving a substantial tax liability on their death, considerably reducing the value of the estate being passed to their chosen beneficiaries.

If you’re concerned about passing on a potentially large inheritance tax bill to your loved ones, it’s time you took the initiative. Talking to a financial adviser about your situation can make a real difference, call Mark O’Neill at Jones Harris Chartered Financial Planners on 01253 874255.

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