What is Inheritance Tax Planning, and how can it work for you?
Inheritance Tax (IHT) is payable at a rate of 40% on estates worth over £325,000 at the date of death. It can also become due on certain lifetime gifts of assets, at a reduced rate of 20%. That said, there are planning opportunities available that can mitigate the tax due on your estate, be it gifts of assets to family and friends, charitable donations, or the use of a Family Trust. The most important thing is that this planning is bespoke to you and helps to achieve your wishes for your estate after you are gone.
When should I plan for IHT?
Generally speaking, it’s never too early to plan for IHT. Most people tend to consider tax planning around the time that they first make a Will, or if they are planning to rewrite their Will, as the two exercises go hand in hand. If you have an estate worth more than £325,000 (or £650,000 for couples) then it is worth exploring the options. This threshold is known as the Nil-Rate Band (NRB).
One advantage of planning early is that when you make a gift, the “7-year clock” starts ticking. Provided you have made an outright gift (i.e. that you no longer benefit in any way from the asset you have gifted), if you live for 7 years then the value of your gift falls entirely outside of your estate for IHT purposes.
What do I need to consider?
- The value of your assets now, and how this may change over time
- Ensuring that your own financial security is preserved, especially when making lifetime gifts
- The long term needs of your family and whether your current Will reflects your wishes.
How do I balance the needs of my family with my own?
Whilst outright gifts can be the most straightforward way of planning for IHT, you may not want to do this. This is often when we can consider Trusts or Family Investment Companies as part of a long term plan to involve your family and friends in your wealth, without the need to relinquish it completely during your lifetime.
What if I own a business?
A trading business will usually attract Business Property Relief at a rate of 100%, meaning that you can pass it to your successors with no IHT consequence. That said, there are specific criteria to consider when looking at the trading status of a company, and it is worth reviewing this regularly.
What about my main residence?
Often your most valuable asset is the home that you live in, but gifting this asset in your lifetime is unlikely to remove it from your estate for IHT purposes if you continue to live in it following the gift. In addition to the usual NRB, the Government has introduced a specific relief (the Residence Nil-Rate Band) for those who leave their main residence to a direct descendant; a couple can now leave a property worth up to £1million free of IHT so long as their overall estate is valued at less than £2million. If this doesn’t apply, it may be possible to reduce the value of your taxable estate to below this threshold, thereby securing the RNRB.
It is fair to say that with the right planning, IHT can be mitigated so that your beneficiaries receive a greater proportion of your estate both during and after your lifetime. If you would like to discuss how EWC can help you structure your affairs efficiently for IHT, make an appointment with one of our team today.
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