The Rules
When you die, the Government assesses how much your estate is worth and then deducts your debts to determine its net value, which may be taxed.
Generally speaking, you will have to pay 40% tax on anything above £325,000 if you are single, or £650,000 for a married couple/civil partnership. However, if parents or grandparents pass their main residence to their direct descendants, their estates may benefit from an additional allowance.
What is available
There are certain tax reliefs and exemptions available from HMRC that, when used properly, can help to keep wealth and assets in the family.
Under the IHT spouse exemption, married couples /civil partners are able to pass on the entirety of their estate to their spouse, free from inheritance tax.
Spouses can also use lifetime transfers and gifts to others. When the transfer is between spouses/civil partners (exempt transfer), or when a gift is made to a Charity, no IHT is due.
Lifetime transfers to individuals other than a spouse/civil partner can also be IHT exempt if the donor survives the transfer by at least seven years. If not, IHT will be due at a tapered rate.
Benjamin Franklin once said:
"The only things certain in life are death and taxes".
Unfortunately, Inheritance Tax (IHT) concerns both.
Risks
Effective Inheritance Tax planning, will help mitigate IHT liability and maximise financial benefit to your loved ones. Without careful planning however, your estate becomes exposed to the risks of being liable to inheritance Tax.
Your IHT planning should always be based on your individual circumstances, estate, assets and wishes. Other potential tax liabilities like Capital Gains Tax ought to be included in the discussion as well.
Use of Trusts
Consideration should always be given to your surviving spouse’s/civil partner's needs, and also what happens to their own estate when they die. In addition, mitigating liability to IHT very often requires exploring tax-efficient structures such as Trusts, involving your spouse and your family. Reviewing your situation and arrangements regularly will ensure your wealth and assets pass on to your beneficiaries according to your wishes.
Because Inheritance Tax planning can be quite complex, we recommend to our clients to first discuss their situation with us, so that they understand its impact on their estates and what can be done to mitigate its effects.
Mitigating Inheritance Tax is one of the biggest money saving there is, as careful planning can save your estate and beneficiaries hundreds of thousands of Pounds in Tax. It is therefore of paramount importance to plan in advance and seek the right advice. If you are concerned about your Inheritance Tax liability, contact us and ask any questions you may have.