A useful guide to share with your clients in order for them to better understand Inheritance Tax (IHT), who it applies to, and some of the solutions that are available when it comes to estate planning.
Inheritance Tax No items found.As the chapters of our lives unfold, many of us begin to contemplate the legacy we wish to leave for our loved ones.
Making sure your legacy passes on smoothly, without the weight of high taxes, is crucial for both you and your beneficiaries. This guide aims to make inheritance tax easier to understand so you can make smart choices to safeguard your life's achievements.
Despite common misconceptions, inheritance tax isn't just for the superrich. Due to rising property values, more estates may now have to deal with inheritance tax. In fact, Inheritance Tax receipts for April 2023 to February 2024 are £6.8 billion, which is £0.4 billion higher than the same period last year.
But here's some good news: you can take action while you're alive to deal with potential inheritance tax issues. Whether these actions are right for you depends on your personal finances and circumstances.
In this guide, we explain different options carefully, so you have the information to make informed choices.
Estate planning can seem complex, but it doesn't have to be confusing. Consulting a qualified financial adviser can help you understand your unique situation and significantly impact your estate planning.
At Downing, we are not able to provide financial advice. Investors should consult their financial adviser before making any investment. A financial adviser can help you to plan properly towards your financial goals.
Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died. The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the Nil Rate Band threshold (£325,000).
You generally liable to pay inheritance tax if your estate is valued over the £325,000 Nil Rate Band threshold.
However there are certain circumstances and allowances that are important to understand in order to understand your liability beyond that, we have included the most commonly known below.
Available since 6 April 2017, the RNRB adds an additional threshold when a residence or its sale proceeds are left to direct descendants. It complements the standard NRB but reduces for estates exceeding £2 million and may involve complex calculations for downsized homes or changes in residence.
NB: It’s important to note that the RNRB is only applicable when the main residence is passed to direct descendants, and is reduced at a rate of £1 for every £2 in assets for estates over the value of £2m. Therefore, for an estate worth £2.7 or more, the RNRB would be removed completely.
Spousal exemption from Inheritance Tax (IHT) covers all transfers between spouses or civil partners, whether during lifetime or upon death, provided they are UK-domiciled or deemed domiciled. This exemption ensures no IHT is payable on these transfers.
Imagine a married couple or civil partners have an estate valued at £1.5 million, including their home, which they plan to leave to their children.
Standard Nil-Rate Bands:
Each individual in a married couple or civil partnership has a £325,000 IHT-free allowance, amounting to a total of £650,000 for the couple.
Residence Nil Rate Bands:
Each also has an additional £175,000 allowance under the RNRB when their main residence is passed to direct descendants. This adds up to an additional £350,000 for the couple.
Combining these, the couple has a total IHT threshold of £1 million (£650,000 from the Nil Rate Bands plus £350,000 from the Residential Nil Rate Bands).
With an estate worth £1.5 million:
IHT would be charged on £500,000, the amount exceeding their combined threshold of £1 million.
Estate planning is the process of deciding how to distribute assets efficiently to your beneficiaries.
It's important to include estate planning in your overall financial plan.
The sooner you begin, the more choices and flexibility you'll have to organise your finances, ensuring your financial security while you're alive and the smooth distribution of your assets when you're no longer here.
Don't forget to talk to a financial adviser for personalised strategies that suit your needs.
An important part of estate planning is making a Will. Within your Will, you can specify who will inherit you estate and other matters such as who will look after your children if relevant.
Additionally, you can appoint executors in your Will, assigning them the responsibility to manage and allocate your estate's assets.
Its also important to establish a Power of Attorney, permitting another person to make decisions on your behalf should you lose the capacity to make your own decisions.
In this section, we cover off four widely used strategies for effective estate planning: Gifts, Trusts, Insurance and Business Relief (BR) Investments.
Each method has its unique advantages and potential drawbacks, it is important that you understand them fully before making any decisions. It is worth noting that this is not an exhaustive list of solutions available to you.
Gifts involve transferring assets during your lifetime to beneficiaries, which can have immediate benefits and potential tax advantages.
There are allowances when it comes to gifting. Gifts between spouses and civil partners are IHT free. You are also awarded a yearly £3000 gifting allowance by HMRC. There are also wedding gift allowances of between £1,000 - £5,000 depending on who is receiving the gift.
Trusts are legal arrangements where assets are held and managed by a trustee for the benefit of designated beneficiaries, offering control and protection.
Insurance in estate planning typically involves life insurance policies that can offer immediate tax relief and financial security to beneficiaries.
BR Investments involve investing in qualifying businesses, offering potential for growth and rapid IHT exemption.
You can benefit from BR by; owning a trading business, investing in an estate planning solution with either unlisted share or AIM-listed shares or through an EIS.
However, please note that not all businesses qualify for BR but they have to be in a certain trade. https://www.gov.uk/business-relief-inheritance-tax/what-qualifies-for-business-relief
Selecting the appropriate estate planning solution is crucial, but it can also be intricate. Several factors should be considered when deciding which tools or combination of tools best align with your circumstances.
Most importantly: Please speak to your financial adviser in order to decide which solution is right for you.
Before choosing solutions, assess the value of your estate and its individual parts. Do you primarily have liquid assets like cash or shares, or is your wealth tied up in properties, businesses, or other investments? The type and value of your assets will shape your planning strategy.
By identifying your goals, you can align your planning solutions more effectively with your desired outcomes.
Your chosen beneficiaries may have differing degrees of financial freedom and financial expertise.
For instance, leaving assets to minor children might necessitate a different strategy than transferring assets to an adult child or a charitable organisation. Think about the age, financial literacy, and needs of those you aim to benefit.
Some estate planning solutions, such as gifting, can take effect immediately, while others, like Trusts or BR-Qualifying investments, may be more or less suitable depending on the time horizons.
Some individuals prefer straightforward solutions, while others may be at ease with more intricate strategies that offer greater benefits or control. It's vital to opt for solutions that you comprehend and are comfortable with.
Every investment carries risks. If you're contemplating using BR-qualifying investments as a part of your estate planning, evaluate your risk tolerance to ensure it corresponds with your investment choices.
Consulting with financial and legal professionals is always advantageous. They can offer insights tailored to your situation, inform you about the latest tax laws and regulations, and guide you in making well-informed decisions.
Once you've opted for an estate planning solution, it's essential to revisit it periodically. Your financial status, objectives, tax laws, and family circumstances can evolve. By regularly reviewing your estate plan, you can ensure it continually aligns with your goals.
In conclusion, deciding on the correct estate planning solution is a deeply personal process that varies for every individual. Reflect upon your circumstances, aspirations, and preferences, and seek expert guidance to craft a comprehensive plan that's tailored to your requirements.
Opinions expressed represent the views of the author at the time of publication, are subject to change, and should not be interpreted as investment or tax advice.
Important notice: This article is for investment professionals only. This article is for information only and does not form part of a direct offer or invitation to purchase, subscribe for or dispose of securities and no reliance should be placed on it. No reliance should be made on this content to inform any investment of tax planning decision.
This content contains information that is believed to be accurate at the time of publication but is subject to change without notice. The explanation of all of the tax rules set out have been written in accordance with our understanding of the law and interpretation of it at the time of publication.
Whilst care has been taken in compiling this content, no representation or warranty, express or implied, is made by Downing as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
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