Inheritance Taxation
What exactly is Inheritance Tax?
Let's dispel a myth right here and now. You don't have to be rich for your estate to be subject to Inheritance Tax. Currently it's levied on everything you leave over £300,000. See for yourself what it includes:
- your investments and savings
- your home and caryour furniture and personal effects
- the proceeds of your life insurance, unless it is written in trust.
The rate of Inheritance Tax is 40% for everyone. This is equivalent to the highest current rate for income tax. The tax is paid by those that inherit - and is deducted from the estate on death - so Inheritance Tax is relevant whether you stand to gain an inheritance or you plan to leave one.
Gaining an inheritance
However big or small your inheritance, there are a number of ways to put your money to good use. The ideal way, of course, is to invest at least some of it so it grows into a more substantial sum.
Top up your pension with your inheritance
With many people now spending as long in retirement as they do in their working lives, it's wise to add to your pension. Especially when you consider that the State Pension is considerably lower than average wages and is forecast to drop further in real terms. By making a one-off lump sum payment into your pension fund you can make a big difference to the quality of your retirement.
Invest it for the future
Another way to invest your inheritance is to place it in an Individual Savings Account (ISA). These are tax-free in the hands of an investor, and could be an ideal way to help save for a rainy day or to give you a more comfortable retirement. Other options to consider include Friendly Society accounts and National Savings and Investments.
Leaving an inheritance
Have you also thought that one day you may be leaving an inheritance too? Without some careful planning, it might be a lot less than you think. That's because the taxman might ask your family to pay Inheritance Tax. And in addition to that, the Government's ongoing review of the fairness of the tax system is likely to affect any inheritance planning, so you should think about making some plans soon.
Writing a will.
For a lot of people, making a will is the most obvious way to plan for the future and the fairest way to provide for loved ones.
Yet, it's a fact that a large percentage of the UK population do not have a will. Dying without leaving a will is called "dying intestate" - which means that all your "wealth" is divided up between each surviving member of your family. If you haven't any family or beneficiaries, it goes straight to the Crown.
Another drawback of intestacy is the fact that it doesn't recognise unmarried partners, friends or charities and such like. All this heartache - and the inevitable delays - can be avoided if you make a will.
Prosperity may be able to help advise you on the content of your will, or alternatively recommend the services of a local solicitor. At a cost of around £80 writing a will could save your family many pounds - and much worry.
Inheritance Tax planning
There are a number of ways we may be able to help you to reduce any possible Inheritance Tax.
We may, for example, advise you to make gifts now to intended beneficiaries as these gifts are free of Inheritance Tax, providing you live for 7 years or more following the gifts. There are several other tax-efficient ways of making annual gifts, both to individuals and organisations such as charities.
You could then leave a further £300,000 free of Inheritance Tax to them in your will. Gifts between married couples incidentally are not subject to any Inheritance Tax. You might like to think about setting up a trust. If you put part of your estate into a trust for your grandchildren, it could be decades before your cash is again under the eye of the taxman. Trusts can be complicated and we may work in conjunction with a solicitor.
Another option you might like to consider is an insurance policy to pay the tax bill after you die. Prosperity can compare all insurers to help find the right policy for you.
Some questions to ask about Inheritance Tax (IHT) Planning
· Are there advantages in making grandchildren the main beneficiaries of my will?
· What is the Nil Rate Band?
· What is the IHT liability if I own property abroad?
· Can I "gift" my house to my children but remain living in the property?
· What are the rules relating to gifting personal effects?
· Is any IHT charged on the inheritance left to my spouse?
· What are the IHT rules on "gifts within the 7-year period prior to death"?
· How do I set up a family trust?
· Can I really give away £3,000 each year free of IHT?
For further information on the subject contained in this guide, please contact Prosperity Financial Management Ltd.
Please note that levels and bases of, and relief's from taxation are subject to change.