19 Jul 2013

Inheritance Tax - Why Pay It?

Inheritance Tax - Why Pay It?

Steven Ritchie, Financial Adviser provides an insight in to Inheritance Tax planning to ensure that your family and loved ones are protected.

Steven Ritchie, Financial Adviser provides an insight in to Inheritance Tax planning to ensure that your family and loved ones are protected.

What is Inheritance Tax?

Inheritance tax is a one-off tax on money or assets you leave behind when you die and on some gifts you make during your lifetime.  On death, a certain amount can be passed on tax-free, we call this the tax free allowance. This is also known as the ‘nil rate band’ and for the 2013/14 tax year, this remains at £325,000. This allowance has remained the same since 2010/11 and will stay frozen until at least 2017.

Thresholds & Rates

If you are single and die during this tax year (2013/14) with an estate worth more than £325,000 (including money, investments and property less any debts/expenses) then 40% tax will become payable on anything above the £325,000. 

Married Couples & Civil Partners

If you are married or have a civil partner, you are allowed to pass your assets to each other tax-free and, since October 2007, the surviving partner is now allowed to use both tax-free allowances. This effectively doubles the amount the surviving partner can leave behind tax-free (assuming none of the IHT allowance was used on first death) without the need for tax planning.  So joint assets in excess of £650,000 will be taxed at 40% in this case.

There are however a number of ways to reduce the amount of Inheritance Tax your family will have to pay after you have gone:-

Gifts

Rather than waiting until you are dead to pass on your assets, you might want to dispose of some of them while you are still alive. There are lots of gifts you can make which can reduce the value of your estate.

• You can give away as much as you want, to anyone you want, in the form of "potentially exempt transfers". As the name suggests, these are only potentially exempt from Inheritance Tax.  Under the rules, if you live for seven years after making them they are exempt; if you die within seven years then they will be added to your estate and, if the estate is worth over £325,000, the gift will attract some tax.

• The use of trusts can often soften the blow of giving away money offering possible access to funds or income for life whilst still allowing some protection from possible Inheritance Tax in the future.

• Specialist Inheritance Tax investment plans can see assets being out of your estate after only two years but you still retain control of the funds and enjoy income from them.  A very quick but flexible way of reducing Inheritance Tax as long as you are clear about what you are investing in.

• You could accept the Inland Revenue are going to get their money but an insurance company will pay it.  A number of life assurance plans may be effective for reducing or mitigating an Inheritance Tax bill, however, cost and health have to be considered.

You can also give away up to £3,000 in each tax year (annual allowance) without it being included in your estate when you die. Other small gifts can be made which are immediately exempt but in reality these normally have minimal impact on most estates which qualify for Inheritance Tax charges. A lesser used allowance is gifting from regular income which for clients who have high pension levels in retirement and low expenditure can offer immediate exemption on an annual basis for qualifying funds.  A very quick and simple way of reducing Inheritance Tax bills where appropriate. 

Paying IHT

The tax due on an estate is calculated by the executors of the will and must include all assets and relevant gifts made within the last seven years. The executors must then pay the tax due within 6 months of when the person died.

Raising the money to pay this tax bill could mean cashing in any savings accounts held by the deceased, and/or selling some of the assets. If money is tied up in property you can arrange for the tax bill to be paid by monthly instalments over 10 years, however, interest will be added to the bill.

Best Option?

Prevention is better than cure!

All too often we have clients saying "if only I had done this sooner" and of course the client is right.

This can be a complicated subject but in most cases the means of mitigating possible Inheritance Tax can be quite straightforward as long as time is on your side so take professional Independent Financial advice at an early stage and potentially see your family benefit and the tax man lose out as doing nothing will almost certainly see the opposite happen.

Steven Ritchie, Investment Adviser


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