What is inheritance tax?
Do you have questions about inheritance tax? Here Susie Laws, director and chartered financial planner at Fiducia Wealth Management, explains some of the key points.
What is inheritance tax and is it likely to affect me?
It has been said that the only certainties in life are “death and taxes”. That’s not to say however that all taxes are mandatory. Inheritance tax has been described as the only voluntary tax.
HMRC netted £5.2 billion in inheritance tax receipts in the tax year 2017/18. Up from £1bn in 1993. Currently 4% of UK estates pay inheritance tax.
Each person has a nil rate band (NRB) of £325,000. Transfers between spouses and civil partners are free from inheritance tax and a married couple/ civil partners can combine their allowances to leave £650,000 free from inheritance tax on second death.
The government has also introduced a second allowance which is linked to a main residential property. This is currently £125,000 (per person) and this will increase by £25,000 per tax year until it reaches £175,000 by the 2020/21 tax year.
Joint estates of over £2m will begin to lose the additional residence NRB and those over £2.5m will only benefit from the standard NRB £325,000 per person.
Therefore, most individuals with estates of more than £450,000 or £900,000 for a married couple/ civil partnership will pay inheritance tax on death at a rate of 40% on the excess.
Am I too young to plan for inheritance tax?
You are never too young to factor inheritance tax into your overall financial planning.
It is likely that the planning will become more focussed as a client gets older but even younger clients should have structures in place to ensure that an inheritance tax problem is not being exacerbated further down the line.
For instance, a client may look to invest in additional properties which they rent out with the ultimate goal of these providing an income stream in retirement. However, these will form part of their taxable estate for inheritance tax whereas investments into a pension will not.
So, what can I do?
Simple things like ensuring that life insurance policies are written under a suitable trust can make a big difference. If they are not written under trust then these may form part of your taxable estate and would be subject to inheritance tax on death.
Funding pensions can also be a good way of removing funds from your estate as these would not normally form part of your taxable estate on death. In some cases, pension funds can be inherited by your beneficiaries completely free of all taxation.
They can also be passed to your beneficiaries without the need for probate, which means that your loved ones can benefit from the funds quickly and with limited administration.
It is important that clients ensure that their Wills are up to date and well structured and that these are stored securely.
Beyond that we use the mantra of “spend it, gift it, plan for it”.
Making an outright gift can sometimes be challenging for a client, especially if there is a chance that the capital may be needed to provide them a regular income in future. Lots of smaller allowances can be utilised, for instance, an annual gift allowance of £3,000 per person, gifting out of regular expenditure.
Loss of control over how the funds are then spent by the recipient can also cause concerns.
Trusts can be used in circumstances where the person making the gift does not wish to fully lose control over the capital.
Other investment based inheritance tax solutions can also be used. Normally there is no one answer that is right for all clients in all circumstances.
A blend of solutions and planning which are tailored for a client’s individual needs will always produce the best outcome.
If you would like to know more about how we as Financial Advisers can help you with your or a loved one’s Long Term Care needs and general latter life planning then visit the Later Life Planning section of our website: Later Life Planning or send us email at: firstname.lastname@example.org
The information contained in website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occasioned in connection with the content hereof and any such action or inaction. Professional financial advice is necessary for every case.
Fiducia is an award winning firm of Financial Advisers based in Dedham near Colchester situated in the heart of Constable Country on the Essex Suffolk border. www.fiduciawealth.co.uk
Fiducia Wealth Management Ltd. Dedham Hall Business Centre, Brook Street, Dedham, Colchester, Essex, CO7 6AD.
Fiducia Wealth Management Ltd. is authorised and regulated by the Financial Conduct Authority.. FCA No. 408210