What to do about inheritance tax
‘Inheritance’ can be a scary word. It’s therefore one of those topics that tend to get put on hold, through our 40s, our 50s, even into our 60s, because we quite naturally avoid discussions that force us to think about anything to do with death.
However, it’s worth giving some thought to as there are lots of things you can do to ensure the smooth and tax-efficient transfer of your estate to your children and loved ones. And this can help them to avoid a hefty, and often quite unnecessary tax bill.
What is Inheritance Tax (IHT)?
If your estate is valued above the current IHT threshold of £325,000, anything above that threshold will be taxed at 40% when you die. That’s why IHT is sometimes referred to ‘the tax for people who love the government more than they love their own children’!
Your ‘estate’ sounds very grand, but it actually refers to the value of your assets, which can include cash in the bank, investments, property, vehicles and payouts from life insurance plans, (minus any debts).
And that’s why IHT planning isn’t necessarily just for ultra-wealthy people, because, as you can imagine, £325,000 can soon mount up! Although if you’re married or in a civil partnership, you and your spouse both have this allowance, so between you, it’s £650,000.
The good news is that, with a little forward planning, we can help you minimise or even avoid paying any IHT. That’s why we prefer to think of it as ‘the most avoidable tax of all’.
The rules are complex
At Bow Financial Services, we know the tax rules intimately, so we can help you to draw up an IHT action plan. To get you started, here are some pointers:
1. First, make a will. Not only does this give you control over who gets what, but it will speed things along much more quickly and efficiently.
2. Second, when you’ve made your will, keep it up to date. You would be amazed how many people forget to do that. It’s particularly important to update your will if, for instance, you divorce, or a family member named in your will should die, or you move to a new house, or (perhaps most important) new grandchildren come along.
If you don’t make a will you die ‘intestate’, which can bog your family’s inheritance down in probate and delay the full transfer of your estate for months, even years.
3. Third, alongside keeping an up-to-date will, it’s important that your family know that you’ve done it and know where to find it. They need to know how to contact your solicitor, if that’s where it is stored, particularly if he or she is your executor responsible for producing and implementing your will. It also helps to record the details of your investments, and which companies are handling them. One solution is our wealth platform. This system has a document storage facility where you can securely store copies of documents, such as your will and power of attorney. You can also sign a form giving your executor’s or attorney’s permission to contact Chris in the future.
There are other areas that can really help. Putting your insurance policies in a Trust for example can drastically reduce your exposure to IHT. For example, if you had a life policy set to pay out £200,000 to your family, and that were to come in above your IHT allowance, it would be taxed at 40%, so they would lose £80,000.
However, if you have us write your life insurance ‘in trust’, this removes it from the value of your estate. Not only have you cut the value of your estate by £200,000 for IHT purposes, but you have most likely given your family that additional £80,000 back.
Another issue that causes many of our clients anxiety is passing gifts or their home over to their children before they die, without incurring unexpected taxes.
First of all, small gifts such as those at Christmas or birthdays that come out of your income often qualify as ‘exempted gifts’, and do not add to the value of your estate, so there will be no tax to pay. You have up to £3,000 per tax year to use in this way.
Secondly, although it’s possible to pass on the family home to mitigate IHT, it’s not that simple. In fact it’s fraught with risk and might not work to solve the problem, so we’d certainly recommend seeking advice.
So, to recap: making a will, keeping it up to date and letting your family know where to find it are all good ways to get started.
Add to that a bit of planning ahead to minimise the value of your estate for tax purposes and you’ll have solved the dreaded IHT issue. Then you can go away and forget all about it!
Give us a ring if you’d like to get the ball rolling.