It’s understandable that few of us want to talk about death but our haste to avoid awkward conversations around death and inheritance may get in the way of good financial planning.
This – and rising property prices – may account for the staggering £5 billion collected by the Treasury each year.
The average inheritance tax (IHT) bill is now £180,000. That might strike you as a large figure for what is essentially a ‘voluntary’ tax. It’s described as optional not because you can refuse to pay, but because good planning may avoid the liability in the first place.
The complexity of the rules is another reason why people may pay unnecessary IHT. George Martineau, Seven Investment Management explains the basics, but we do recommend taking professional advice before making any decisions.
There is no IHT to pay when you die, if you leave everything to your spouse or civil partner. Your estate will also be exempt if the total value of your estate is less than £325,000.
Your heirs must pay tax at 40%, on anything over £325,000. It’s charged not just on the value of cash and investments, but also property, payouts from life assurance, and possessions such as jewellery, cars or furniture. Pensions, however, are not liable to IHT – worth remembering when you’re looking at tax-efficient investment options.
In addition to the main ‘nil-rate allowance’ of £325,000, there’s a residential nil-rate allowance of £125,000 if you leave your main home to a direct descendant (your children and grandchildren).
Transferring your allowances
The real potential for IHT planning lies in the rules around IHT reliefs and transferring your allowances. Spouses and civil partners can transfer any IHT allowances unused on the first person’s death, and use them at the time of the second person’s death. With effective planning, a couple could leave an estate worth up to £900,000 IHT-free. This sum will increase to £1 million by 2020.
Another popular estate planning option is to reduce the value of your estate by making gifts within your lifetime. Not all lifetime gifts are IHT-exempt, but many are, and it’s worth doing your homework and getting advice.
There are also IHT reliefs around farms, woodland and businesses. Tailored advice is essential is making the best use of these allowances.
The bigger picture
Inheritance tax mitigation should never be the sole focus of estate planning. There are pitfalls around getting this wrong, including finding yourself very short of cash in your own time of need.
But, if you ignore IHT planning completely, your heirs may pay thousands of Pounds in tax needlessly.
You need an adviser who understands the rules, and can give you expert advice on how to apply them to your own situation in order to get the equilibrium right between the two.
About the Author - George Martineau is Head of Financial Planning at Seven Investment Management. Visit their website to find out more or give them a call on 020 3823 8678 to find out how they can help. Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority and by the Jersey Financial Services Commission. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.