Death & taxes

Posted on: 29 August 2014 by Steve Wanless

Whether you're super-rich or not - you will either worry about running out of cash, or that what's yours ends up with the Treasury.

Death & taxes

Do we worry too much about money? Not only do we have to make sure that there’s enough to get through life, there’s the real concern of making sure what’s left ends up with our loved ones, rather than the Treasury.

For the super-rich, the worry is reversed. Too much can cause as much, perhaps even more damage, as too little; steps are taken to give away money to charity, set up Trusts and Foundations.

Increasingly, parents are performing a supporting roll, way beyond childhood and offering financial assistance in terms of property purchase and their grandchildren’s education.

Such is the spending power of the “baby boomers” – the post-Second World War generation born between 1946-1964, who have lived through several property booms and enjoyed the benefits of final salary pension schemes.

Depending on whether you are a glass “half-full” or “half-empty” person, you will either worry about the cash running out, or the Taxman taking 40% of what is rightfully yours and money on which tax has already been paid!

What does concern many is seeing the assets built over a lifetime used up by care home and other health bills so there is little to pass on. Unfortunately, that is one of the consequences of an increasing life expectancy.

Specialist advice, both financial and legal, is crucial; but ultimately these experts are there to carry out your wishes and desires. They may point out that what you are planning to do is not possible, very complicated or is something that might change in the future.

The skill (or trick) is to use the tax advantages to give away as much as you can – WITHOUT leaving yourself vulnerable, financially or otherwise.

More and more people are facing inheritance tax (IHT) bills. In 2011-12 fewer than 3% of estates (the amount that is left by the deceased) paid death duties. That is expected to triple in the next five years.

There are basically two reasons for that.

Firstly, the IHT threshold (the level above which the 40% duty is paid) has remained the same (£325,000) since 2009 and the Chancellor George Osborne has stated there will be no change until 2018 at least.

This is the same George Osborne who as shadow Chancellor in 2007 promised to raise the threshold to £1m when the Conservatives returned to power. Whether the IHT will remain frozen for three years if the Tories win next year’s General Election is anyone’s guess.

That shows the necessity to remain flexible and vigilant when planning ahead, just as the pension changes proposed in the March Budget to start next April have opened up new opportunities in that area.

Secondly, the rise in property prices has pushed many, especially those in the South of England and in the major cities, way above the threshold limit on that asset alone. Unlike other investments and assets, it is very difficult and potentially unwise to give it away or split it up without selling it.

Inheritance tax brings together the two certainties of life – “death and taxes”. A recent global study shows we have cause to complain in the UK and Ireland.

We would all be jumping for joy with an IHT threshold of £3.2m – that’s what the citizens of the United States enjoy.

Countries like Australia and New Zealand have scrapped them all together. The average yield on a European estate of £1.8m is 14%, globally it’s 8% and in the UK it’s more than 25%. In China, Brazil, India and Russia, the tax paid is under 1%.

Prime Minister David Cameron has repeatedly said: “Inheritance tax should only really be paid by the rich. It shouldn’t be paid by those who have worked hard and saved and bought a family house. It is something we have to address in our manifesto.”

Voters would much rather hear those promises than threats of a mansion tax. Currently, the UK’s death duties are the second-highest in the developed world, with Ireland the highest.

It is not all “take, take, take” from the taxman. Careful planning and regular up-dates to your will can take advantage of several exemptions.

Currently, you can leave everything to your spouse or civil partner without any duty being due. When they die, they can add as much of your £325,000 threshold that remains unused to theirs, making potential £650,000 exempt.

Charity gifts are also exempt, as are other gifts, provided you have survived for seven years, and £3,000 can be given away each year. Currently, an untouched pension pot can be left outside any inheritance tax calculation. Gifts can be made out of income, provided it doesn’t affect your lifestyle.

As ever, specialist advice is essential when making these decisions.

There are those who take the view “why worry” as they are no longer going to be around, but you do have a duty of care to your family.

A recent document from the Audit Commission showed there really is life after death for some.

The study revealed that in the two years from May 2012, there was £229m of fraud in the public sector – and £76m of that came from pension payments to people who had been dead for several years.

It also identified more than £2m paid to private care homes by a local council for the care of 182 residents who had died!

For a free, no obligation initial chat about your individual finances, call us on 0800 0112825, e-mail or take a look at our website

The value of shares and investments can go down as well as up. Your home may be repossessed if you do not keep up repayments on your mortgage. 

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