Inheritance tax – once known as Estate Duty used to be something that only troubled the seriously rich. Now, with house prices rising in line with a recovering economy, many more people are starting to find that the taxman will take a share of their legacy before their loved ones. But there are steps you can take to help ensure your wealth goes where you want.
The Inheritance tax (IHT) net is catching out more and more people, thanks to recovering house prices meaning that many more of us have estates worth above the threshold value of £325,000 – or £650,000 for married couples and civil partners. According to official figures, IHT receipts have climbed for the third year in a row.
With assets beyond the IHT threshold taxed at 40% it can mean a substantial loss. However, inheritance tax liabilities can be reduced or even avoided altogether – if you make estate planning part of a long term financial strategy. Your financial adviser should be able to suggest some effective solutions. The most obvious way to reduce potential IHT is to give money away before you die.
You can give £3,000 away every year. You can give an unlimited number of small gifts of up to £250 per person and larger gifts to a couple on their marriage. It may seem a simple solution – but you may need to start your generosity early. Beyond these allowances (or ‘regular payments made from income without affecting your standard of living’), money given away in the seven years before you die may be counted as part of your estate and therefore subject to IHT.
However, although gifting cash is easy enough, for most of us, property is our main asset, and the reason why our estates fall into the scope of inheritance tax in the first place. Obviously, you can’t gift small parts of your home – but there are some measures which can take your property outside the IHT threshold. Downsizing is one answer, but there are some financial measures your financial adviser could discuss with you.
Other alternatives include whole of life insurance policies with enough cover to take care of the IHT liabilities. There are also certain classes of investments which can provide some measure of exemption for your heirs – while still providing you with the potential for income while you can still enjoy it.
You can give an unlimited number of small gifts of up to £250 per person.
Certain classes of investments can provide some measure of exemption for your heirs