Estate planning & inheritance tax
Minimise your inheritance tax bill
Estate planning is an essential part of your overall financial plan. It helps you to preserve as much of your wealth as possible and ensure the biggest beneficiaries of your estate are your loved ones.
Inheritance tax (IHT) is one particular area of estate planning that often requires additional consideration. Our expert advisers will help you to minimise the impact this can have on your estate. In certain circumstances, this reorganisation can also have the beneficial effect of reducing your overall income tax bill. There is no single solution for minimising your IHT liability. For some it makes good financial sense to pass on assets whilst you are still alive. For others, a dedicated insurance policy may be more suitable. We will tailor a solution that suits your assets and aspirations. We will also help to ensure your will is properly structured.
Some people regard inheritance tax as unfair and can be particularly hard to accept due to the nature in which it comes in to play. However, inheritance tax is often referred to as a voluntary tax because there are a number of strategies that can be employed to mitigate inheritance tax liability. These range from accepted schemes to more contentious strategies, generally depending on the amount of tax you might be able to save.
Inheritance tax is most commonly paid on the transfer of an individual’s estate on death but can also be due on some lifetime wealth transfers. The current IHT rate (if being paid on death) is 40% on the value of all worldwide assets, less any reliefs and exemptions, that exceed a ‘de minimis’ allowance (known as the nil rate band).
The Nil Rate Band
The nil rate band (NRB), also known as the IHT threshold, is the amount up to which an estate has no IHT to pay. The NRB is currently £325,000 and is set to remain at this level until 2020/21. Each individual has their own NRB, so for a married couple (or civil partnership) the threshold is £650,000. If the total value of your estate is under this threshold, your IHT rate is 0%. Any part of the estate that exceeds the NRB threshold is chargeable to IHT on death at 40%.
The Residence Nil Rate Band
The Residence Nil Rate Band (RNRB) is an additional allowance to the NRB. It is only available if you are going to pass your main residence down to direct descendants. The current rate is £125,000 per person but is set to rise to:
- £150,000 in 2019 to 2020
- £175,000 in 2020 to 2021
This means, for a married couple or civil partnership, the current total allowance (NRB plus RNRB) is £850,000 and will eventually rise to £1,000,000 in 2020.
As with any allowance, there are a number of factors that may impact your ability to make full use of them. If your estate exceeds the available thresholds, there are a number of strategies that can be implemented. Adopting a ‘wait and see’ attitude will rarely bring any advantages due to changing economic and political fortunes. Losses seldom, if ever, accrue through taking action. Furthermore, you can gain significant advantages should detrimental changes be introduced to the existing regime at a later date.
A number of simple measures exist which can make a substantial difference to your inheritance tax liability. Taking a long term view to inheritance tax planning is will ensure you maximise the benefits of the exemptions and reliefs available. Key considerations include:
- making a will
- sharing assets
- making full use of IHT exemptions and reliefs
- pension funding using new flexible pension rules
- maximising the nil rate band and the new residence nil rate band
- making lifetime gifts
- ensuring beneficiaries have enough money available to pay any IHT liability
If a will is not in place at the time of death, the state will divide your assets according to the intestacy rules. Intestacy rules differ in the UK with England and Wales having a slightly different approach from Scotland. It is important to understand intestacy rules, particularly when it comes to children. The rights of step children differ between intestacy rules and the RNRB. Your financial adviser will ensure your will is properly structured to protect your interest.
The world of pensions has undergone a significant amount of transformation in recent years. A pension plan is one of the most tax efficient vehicles, but arrangements need to be reviewed to ensure this tax efficiency is in place and remains in place. Under the majority of pension arrangements death benefits do not form part of the deceased’s estate and are normally exempt from IHT.