What is Inheritance Tax?
Inheritance Tax (IHT) is a tax paid to the Government when you die on everything you own. As long as the total value of what you leave behind is less than £325,000 per person (2013/14 tax year), there won’t currently be any inheritance tax to pay. This is known as the nil rate band i.e. from £0 – £325,000. The nil rate band for inheritance tax and the rate of tax is usually set by the Chancellor each year in the budget. Any assets above the nil rate band could be taxed at a whopping 40%.
Isn’t inheritance tax just a tax for the rich?
It used to be, but not any longer. Soaring house prices in recent years has meant many more of us will be affected by inheritance tax. When you also include the value of your other belongings such as your car, jewellery, furniture and so on, it’s easy to see you could be worth much more than you think.
Whose problem is it?
Although inheritance tax won’t affect you personally, it could be an extra burden for your loved ones when they are grieving. And do you really want to see up to 40% of the wealth you have worked hard to create in your life going to the government as inheritance tax after your death?
The executors (or legal personal representatives) of your estate are responsible for arranging payment of the inheritance tax. If you’ve chosen members of your family for this task this could mean even greater stress for them at a difficult time.
Can I do anything to help reduce inheritance tax?
Yes the good news is that there are solutions available.
You may be surprised to learn that the first place to start is your Will and you can write your Will in a way that could reduce inheritance tax. By leaving your estate to your beneficiaries in the right amounts, you could protect them from the headaches associated with having to pay an inheritance tax bill.
If you’re married (or you and your same sex partner are registered as civil partners from 5 December 2005), the trick is to make good use of the nil rate band whilst you and your spouse are still alive. It may seem sensible to leave your estate to your spouse because no inheritance tax is payable on assets left to your husband or wife. However, you could just be delaying the inheritance tax problem, or even making it worse.
From 9th October 2007, it has been possible for spouses and civil partners to transfer their nil-rate inheritance tax band allowances so that any part of the nil-rate band that was not used when the first spouse or civil partner died can be transferred to the individual’s surviving spouse or civil partner for use on their death.
Investments for Inheritance Tax Planning
There a number of different ways of investing money to mitigate Inheritance Tax such as:
- Discounted Gift Trusts
- Loan Trusts
- AIM Portfolios
- Enterprise Investment Schemes
- Business Property Relief Schemes
We have produced a detailed Estate Preservation Guide for further information, please click on the link to the left.
How can we help?
These are just some of the ways of mitigating Inheritance Tax and Inshore IFA can help you find a suitable solution to your inheritance tax problem, taking into account your current and future needs. This is a highly specialised area of planning and should not be entered into without financial advice.
The Financial Conduct Authority does not regulate tax advice, trust advice or will writing services.