Latest statistics tells us that 45% of retired British people have not discussed Inheritance Tax Planning (IHT). Furthermore, the average age for putting a Will in place is 58. These findings seem incredible when you consider the potential costs that are at stake.
IHT is a tax that has a standard rate of 40%, levied on the estate (property, assets, savings and investments) of a person who has died.
The current threshold is £325,000, which means anything above and beyond is liable to 40% IHT. For example, if you had total assets of £400,000, your estate would be liable to IHT of £30,000.
Putting an effective Will in place can help minimise the amount of IHT payable on your estate; protect your partner and maximise the value of your estate that goes to your loved ones.
Mirror Wills (discussed in a previous blog) ensure that your husband or wife receives your half of your estate, as well as your personal threshold. This means that when your partner dies, he or she will have a threshold of £650,000 before any IHT is payable.
Another way to reduce the potential for IHT on your estate is to make a series of ‘Gifts’ to family, friends and loved ones.
‘Gifts’ such as property, possessions, investments/assets can be described as ‘potentially Exempt Transfers’, since such ‘Gifts’ are subject to the 7 year rule, where should you pass within the 7 year period – from making such ‘Gifts,’ a degree of IHT is still payable. Knowledge of such a ruling can have the effect of possibly making one focus on producing a Will, and making ‘Gifts’ somewhat earlier in life.
The 7 year rule means that a ‘Taper Relief’ system is used. So if you die less than 3 years after you made the ‘Gifts,’ 40% IHT is still payable; 3 to 4 years sees the amount of IHT payable reduced to 32%; 4 to 5 years 24%; 5 to 6 years 16% and 6 to 7 years 8%. Anything after 7 years is tax free.
You also need to be aware that if you ‘Gifted’ property, and transferred it at a value that’s recognised as being well under the “then market rate”, HMRC will view the difference as a ‘Gift.’
There are also smaller ‘Gifts’ that you can make that are known as ‘Exempted Gifts’. These are not subject to tax, and you have an allowance of £3000 a year; where such Gifts’ are not considered part of your estate. You can also give wedding ‘Gifts’ of up to £1,000 per person and ‘Gifts’ of £2,500 for grandchildren and £5,000 for children – besides ‘Gifts’ for charities or organisations of your choice.
Exempted ‘Gifts’ in the form of £250 per person can be made – provided they haven’t received another exemption.
Aside from these simple tips our estate planning team can use Trusts and other complex structures to minimise or even eliminate your IHT liability. Get in touch to find out more.