What is Inheritance Tax Planning
Inheritance tax planning is the process of organising your financial affairs to minimise the amount of tax that may be due on your estate when you pass away. This involves strategies such as making use of tax exemptions, gifting assets, setting up trusts, or life assurance policies to protect your wealth for future generations.
Effective inheritance tax planning ensures that more of your hard-earned assets go to your loved ones, rather than being lost to taxation. At MoneyMatters, we provide expert guidance to help you navigate these options, giving you peace of mind that your legacy is secure.
Are you concerned what will happen to your estate on your death?
What Inheritance tax, if any, would be payable? (previously known as “Death Tax”).
Would you like to gift monies to grandchildren or set up a Life Insurance Trust for beneficiaries?
We can provide you with the appropriate advice and guidance to help safeguard your estate for your family, and ensure your wishes are taken care of.
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Why work with an inheritance Financial Advisor
Navigating the complexities of Inheritance Tax (IHT) can be a daunting task, especially when it comes to protecting your estate for future generations. By working with an inheritance tax adviser, you gain access to tailored expertise designed to help you minimise tax liabilities while ensuring your wealth is passed on in line with your wishes.
An experienced adviser can provide guidance on the latest tax laws, reliefs, and exemptions, allowing you to make informed decisions.
What are my inheritance tax thresholds
Inheritance Tax (IHT) is a tax on the estate (property, money, and possessions) of someone who has passed away. The standard IHT threshold is currently £325,000. This means that if the value of your estate is below this threshold, no IHT is payable. However, if your estate exceeds this amount, it could be subject to IHT at 40% on the portion above £325,000.
There is also an additional Residence Nil Rate Band (RNRB), which may apply if you leave your home to direct descendants, such as children or grandchildren. The RNRB provides an additional £175,000 allowance per person, bringing the potential total threshold to £500,000 for individuals or £1 million for married couples or civil partners (if both thresholds are fully utilised).
Remember, tax laws and thresholds can change, and individual circumstances vary. To ensure you make the most of available reliefs and exemptions, seeking professional advice is crucial. A financial adviser can help you plan efficiently and reduce any potential tax burden on your estate.
Disclaimer: This information is based on current legislation, which may change. Tax treatment depends on individual circumstances, and professional advice should be sought.
What are the Inheritance Tax rates
Inheritance Tax (IHT) is charged on the value of an estate above the tax-free threshold. The current standard IHT rate is 40%. This rate applies to the portion of the estate that exceeds the £325,000 threshold.
However, if you leave at least 10% of your estate to charity, the IHT rate may be reduced to 36%. This can help lower the tax payable while supporting causes that are important to you
Example: If your estate is worth £500,000 and your IHT threshold is £325,000, IHT would be payable on the remaining £175,000. At the 40% rate, the tax would amount to £70,000.
There are strategies available to help reduce the amount of IHT paid, such as gifting, establishing trusts, or making use of the Residence Nil Rate Band (RNRB), which may allow an additional £175,000 to be passed on tax-free if you leave your home to direct descendants. This could potentially increase your overall tax-free threshold to £500,000 for individuals or up to £1 million for married couples or civil partners.
Disclaimer: This information is based on current tax rules, which may change. Tax treatment depends on individual circumstances. Professional advice should always be sought to maximise potential tax relief and exemptions.
Disclaimer: This information is based on current tax rules, which may change. Tax treatment depends on individual circumstances. Professional advice should always be sought to maximise potential tax relief and exemptions.
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When is inheritance tax due
Inheritance Tax (IHT) is typically due within six months of the individual’s death. If the tax is not paid by this time, interest may be charged on the outstanding amount. In some cases, the tax can be paid in instalments, particularly if the estate includes assets like property, but interest will still apply to the remaining balance.
For some assets, such as certain types of trusts or gifts made within seven years before the death, IHT may also become due before the individual passes away. It’s important to keep track of these gifts and plan accordingly to avoid unexpected tax liabilities
What strategies are there for reducing Inheritance tax
Effective planning can significantly reduce the amount of Inheritance Tax (IHT) payable on your estate. By making full use of the available allowances and employing other tax-efficient strategies, you can help preserve more of your wealth for your beneficiaries. Here are some key strategies:
1. Utilising Allowances
The first step in reducing IHT is to ensure you are using all available allowances. Every individual has a tax-free nil-rate band of £325,000, meaning no IHT is payable on this portion of the estate. In addition, the Residence Nil Rate Band (RNRB) allows an extra £175,000 if you pass on your home to direct descendants (such as children or grandchildren). This can bring the total IHT-free allowance up to £500,000 for individuals and £1 million for married couples or civil partners when combined.
2. Gifting and Tapering Relief
Gifting is another way to reduce the value of your estate for IHT purposes. You can give away up to £3,000 each tax year, free of IHT, using your Annual Gift Allowance. You can also make gifts of up to £250 to as many people as you like, provided these are separate from your annual allowance.
If you make gifts that exceed your annual allowance, these may still be exempt from IHT if you survive for seven years after making them. This is known as Taper Relief, and it gradually reduces the IHT liability on gifts made more than three years before death, decreasing further each year until no IHT is due after seven years.
3. Inter Vivos Policies Set Up in Trust
An inter vivos policy is a life insurance policy designed to cover the potential IHT due on gifts made during your lifetime. By setting up the policy in a trust, the payout on death can be used to settle any IHT liabilities on gifts without becoming part of your estate, which can help protect the inheritance left to your loved ones.
4. Using Trusts for Large Estates
For larger estates, trusts can be an effective way to manage IHT exposure. Trusts allow you to pass on assets in a controlled manner while removing them from your taxable estate. There are different types of trusts, such as Discretionary Trusts or Interest in Possession Trusts, each with its own tax implications and benefits. Trusts can help ensure that your estate is distributed according to your wishes while potentially reducing the IHT burden on your heirs.
Conclusion: A combination of using allowances, gifting, inter vivos policies, and trusts can help reduce the amount of IHT payable on your estate. Each estate is unique, and tailored advice is essential to ensure you take full advantage of the available reliefs and plan effectively for the future.
Disclaimer: Tax treatment depends on individual circumstances and may change in the future. It is always advisable to seek professional advice to maximise tax efficiencies and plan appropriately.
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