Inheritance tax planningPosted on: 02 July 2013 by Matt Higham
Matt Higham looks at the consequences of making no IHT provision
The long-term rise in property values, coupled with the fact that the government has now frozen the nil-rate band at which inheritance tax (IHT) starts in at £325,000 until 2019, means that IHT is no longer an issue for just the very wealthy. So what does this mean for you? (1)
Estimates predict this could result in as many as 5,000 families a year falling into this new band. Those caught will also likely pay more with average IHT paid per applicable case rising from £24,600 to £27,227 between 2010 and 2011. (1)
All is not lost as there are a number of steps that can be taken in order to help mitigate any potential IHT. These steps need to be balanced with the fact that individuals are now living longer and need access to capital/income to meet their day-to-day living costs and potential future care costs.
What are the consequences of making no inheritance tax provision?
The nil rate band, which is the value of an estate before it is subject to inheritance tax, currently stands at £325,000 and the government has now frozen it at that rate until 2019. (1)
The Conservatives had initially intended to increase the IHT threshold to £1m by 2015, but in line with other cost-cutting measures implemented since the coalition government came to power in 2010 the rate will remain unchanged until 2019. At that point, it will only increase to £329,000. (1)
If an individual’s estate exceeds this level at the date of their death, any excess over this allowance is taxed at 40 per cent. What this could mean to an individual who has had assets of £1m, 40 per cent tax would be payable on £675,000 of this, equating to a tax bill of £270,000. (1)
So what if this estate passes to the person’s estate spouse? While there will be no IHT charged on this transfer, on the death of the surviving spouse IHT is potentially payable.
We have to bear in mind that in such a case, there will be two inheritance tax nil rate band allowances to use, which allows for the ‘transfer’ of IHT tax allowance between married partners. Even after this the tax would equate to a sizable £140,000. (1)
What can clients do without any professional help?
There are a number of things that could be done to mitigate a potential inheritance tax liability.
- Spending the capital in the course of your lifetime so that your estate is not in excess of the IHT allowance at death. (1)
- Make gifts to individuals, you have an annual allowance of up to £3,000 per tax year which will be removed from your estate immediately. If you didn't use the allowance the tax year before you could make a gifts totalling £6,000. (1)
- Cash gifts to charities, community amateur sports clubs and political parties are also removed from a client’s estate immediately and are not included under the seven-year gifting rule for IHT calculation purposes. (1)
- Wedding gifts in consideration of marriage are exempt where given by a parent of the bride or groom up to £5,000, whilst gifts between the bride and groom or by their grandparents or remoter ancestors of up to £2,500 are also exempt, and gifts of £1,000 by anyone else also fall under this exemption allowance. (1)
- Lifetime gifts for the maintenance of a spouse, child or dependent relative are exempt from tax.
- Make gifts from surplus income. This exemption allows individuals to make gifts from surplus income without limit so long as the gift is made out of income and not capital.
- Use the small gifts exemption where an individual can make small gifts up to the value of £250 to as many individuals as you like in any one tax year. (1)
- Larger gifts above these amounts can be made but you will have to live for 7 years before these gifts (Potentially Exempt Transfers) are outside your estate. (1)
Value of professional advise for Inheritance tax planning
Sensible IHT advice can potentially save thousands in tax. If an individual or couple are unsure about IHT and how it could affect them then professional advice should be taken. This is especially true where there is potentially a large IHT liability, or where circumstances are more complex. These circumstances call for a personal bespoke advice approach as investments can be structured in such a way that not only reduces or eliminates completely any future IHT liability, but as importantly does so without necessarily jeopardising expected or desired standards of living.
IHT planning is a specialist area and it is important to obtain advice from the right people. This process will often include your financial adviser working with accountants and solicitors in order to achieve the best outcome for you and your family.
If you have a query regarding Inheritance Tax Planning or other Financial Advice that you would like to ask Matthew Higham about call 0845 230 9876, e-mail firstname.lastname@example.org or take a look at our website wwfp.net.
The value of shares and investments can go down as well as up.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
All information is based on our understanding of current tax practices, which are subject to change.
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