The end of the summer holidays always seems like a good time to review important issues, like what happens when you eventually pass on.
One of the first things is your estate will be assessed for Inheritance Tax (IHT) liability. Your executors will pay any IHT to HMRC before assets can be distributed.
IHT planning is an extremely complex area and should not be left until the last minute.
At one time Inheritance Tax would have been seen as a problem for the wealthy. But with property prices increasing over the last two decades, it is now a issue for many more people.
Her Majesty’s Revenue and Customs would like to receive 40% of your estate over and above the Nil Rate Band, currently £325,000.
Although the Nil Rate Band is £325,000 it is possible to pass it on to your spouse or civil partner on death assuming, you have left your entire estate to them.
This has the effect of doubling the survivors Nil Rate Band to £650,000 before any liability to IHT. With this in mind, I am going to run through some of the basic things you should be looking to do to mitigate your IHT liability. The most obvious starting point is making sure that your will properly expresses your wishes and is planned with tax efficiency in mind.
This could be by passing your estate to your surviving spouse utilising both Nil Rate Bands on their death or even passing an amount equal to the Nil Rate Band into a trust.
Gifting assets into trusts can be an essential part of a good IHT plan. It can help reduce IHT liability while still allowing you and your beneficiaries to benefit from the assets within.
This process has to be managed carefully as not all gifts qualify.
If you continue to benefit from assets you have gifted away they are likely to be regarded as ‘gifts with reservation’ and fall back into your estate for purposes of IHT, other than through certain types of trust where you may still have access to income. There are certain types of investment which qualify for IHT exemptions.
Two of these are shares in companies listed on the Alternative Investment Market (AIM) and investment in small companies through an Enterprise Investment Scheme.
While these would be viewed as risky investments and definitely not for everyone, there are significant tax advantages to be had.
Death benefits from pension plans are generally exempt from IHT and can provide the surviving spouse with a lump sum and income depending on the circumstances.
The simplest way to mitigate your IHT liability is to work out your liability and affect a whole of life plan for that amount, written in trust for your beneficiaries.
Please email email@example.com if you would like to find out more about IHT planning.