If your assets, including your home, are worth £325,000 or over, you should consider planning for inheritance tax. Although changes in legislation have helped remove many families from the IHT bracket.
It makes little sense to save throughout your life to then pay nearly half to the tax man. The current allowance is that no inheritance tax is charged on the first £325,000 (per person) of their estate, above this figure the tax charge is 40%. However, there are certain actions you can take throughout your life to plan for this such as putting assets into a trust or gifting your assets.
With the recent introduction of the residence nil rate band, in 2020, the tax-free amount will rise to £1 million for couples (made up of £325,000 nil rate band x 2 plus £175,000 residence nil rate band x 2) and £500,000 for singles (made up of £325,000 plus £175,000), as the main residence allowance rises. On properties worth between £1 million and £2 million, inheritance tax will be paid as normal on the amount above the tax-free amount. On properties worth £2 million or more, homeowners will lose £1 of the 'main residence' allowance for every £2 of value above £2 million. So for a couple, properties worth £2,350,000 or more will get no additional allowance.
Options for reducing your inheritance tax:
1. Make a gift to your partner
If you’re married or in a civil partnership, you can give anything you own to your spouse or civil partner (unless your spouse was born outside the UK, in which case the amount you can give away might be limited) The rules are very complicated so make sure you take advice before doing anything. Married couples and civil partners are allowed to pass their estate to their spouse tax-free when they die
2. Give to family members or friends
You can gift assets to family members or friends, however you must gift the asset outright, so that you have no benefit to it and survive 7 years for the asset to be completely out of your estate.
You also have an exemption of up to £3,000 a year and you can give away money to your children and grandchildren when they get married.
3. Put things into a trust
If you put some of your assets into a trust, which you, your spouse and none of your children under 18 years can benefit from, they’re no longer part of your estate for Inheritance Tax purposes.
Some types of trusts are subject to their own tax regimes and the trust might have to pay Inheritance Tax themselves.
Also, trustees are likely to be liable for Income Tax at a rate of 45% and capital gains tax at 28%.
The rules around trusts are complicated so you must take advice from an expert.
4. Leave something to charity
Anything you leave to charity is free of Inheritance Tax so it can be a useful way of reducing your Inheritance Tax bill, while benefiting a good cause. If you leave at least 10% of your estate to charity, it will cut how much Inheritance Tax is due on the rest. The rate at which Inheritance Tax is calculated is 36% rather than 40%.
5. Take out some life insurance
If you take out a life insurance policy, it won’t reduce the amount of Inheritance Tax due on your estate. However, the payout might make it easier for your surviving family to pay the bill. It could mean that they are able to prevent the family home from being sold. It is important that the life cover is written within a trust.
For more information on Inheritance Tax Planning, please contact us.