Inheritance tax and how to arrange your legacy

Want to pass your assets on to family and friends rather than the taxman? You’re not alone. Many of us wish to ensure that those who are important to us are well provided for – and hate the idea that too much of our hard-earned savings and family possessions should go to HMRC. That’s why making a start on inheritance tax planning is a must.

We’d encourage you to seek professional advice from a tax expert. After all, the right advice can save your estate a small fortune in death duty. But we’ve compiled this quick overview to give you a brief insight into the things you should be aware of.

First things first: inheritance and taxation

So what exactly is Inheritance Tax? Well – it’s a tax on your estate’s net value following your death; and can directly reduce the amount you’ll be able to leave for your friends or family. Your estate is the combined value of everything you owned upon dying; so that’ll be your money – both physical and what’s in your bank or building society account; as well as the value of any properties or assets you leave behind.

The starting point for paying tax

The first – and most important step when it comes to Inheritance Tax Planning is understanding what the current guidelines are. At the moment, IHT is levied on estates exceeding in value of £325,000 – though this figure is subject to change in the future. This is the Nil Rate Band (NRB); and is the amount up to which an estate has no Inheritance Tax to pay.

Every individual has their own NRB allowance; but there are certain circumstances that allow for these to be added together. If you’re married or in a civil partnership, and your estate is valued at less than £325,000; any used threshold can be added on to your partner’s to increase it after your death.

While the NRB threshold protects your estate from IHT up to the value of £325,000; if the value of your estate is more than that – you’ll be taxed at a rate of 40% for everything above it. Overall, this works out to be a considerable amount; with the UK’s inheritance tax receipts amounting to approximately £5.32 billion in the 2020/2021 tax year.

Handing-down your family home

On top of the NRB, there’s an additional allowance that can be applied to your estate if the family home is being passed on to the next generation. Known as the Residence Nil Rate Band (RNRB); this extra threshold also applies if it’s being given to adopted, fostered or stepchildren.

For the 2020/2021 tax year, the maximum RNRB that can be applied to an estate is £175,000. Since this would get added to your existing nil rate band allowance; it would mean that your estate could be worth up to £500,000 before you become liable for inheritance tax.

What’s more, this doesn’t mean you have to hold off on selling your property if you want to access the RNRB; it also applies if you’re giving the proceeds from the sale. We’ve previously highlighted some of the benefits of moving into a granny annexe; but it can also help towards inheritance tax planning. By liquidating some of your assets, you’ll have a better idea of your estate’s worth and thereby be able to manage your IHT bill more effectively.

Thresholds for gifts – and any exemptions

Many people want to keep an element of control when it comes to inheritance tax planning and passing on their assets; and so they may choose to give some of their estate away prior to their death. There are several ways you can pass on your money; from one-off payments to providing a regular income – or even putting a trust in place for more complex or long-term gifting.

There are, however, some limitations to what you can give away under the current IHT guidelines. For example, most gifts that leave your estate will still be liable for inheritance tax if they were given within seven years of your death. Most financial gifts will officially leave your estate after seven years have passed; thereby reducing its size and potentially the IHT bill you leave behind.

Every individual also has an annual gifting allowance – which can allow you to give away some of your estate tax-free. Financial gifts of up to £3,000 can be given each year, whether it’s paid to an individual or divided between a group; and still be exempt from IHT.

There’s also incentives in place for those who may wish to donate some of their estate to a registered charity. Those that choose to give away 10% or more of their estate’s net worth, will see their IHT tax rate reduced from 40% to 36%.

Expert advice is worth its weight in gold

There are many other exemptions when it comes to giving away financial gifts tax-free; such as the ability to give a child up to £5,000 on their wedding day – so it’s worth doing your research to find out what’s on offer.

Most importantly though, inheritance tax planning isn’t just about being able to pass on money when you die – it’s also about ensuring you still have enough to enjoy your life for the years to come. Much like your retirement planning, it’s important to seek some financial advice and start planning early; so that you can have peace of mind that you and your family can live comfortably for years to come.

Any questions? We’re here to help

Our dedicated and friendly team is ready and on-hand to offer their expert advice to help many people that have faced the difficulties of planning for elderly life. With over 200 annexes and over ten years experience in the industry – we take pride in making sure our clients feel as ready for what will come as they can.

Get in touch with our team today to see how we can help you with planning for your future.

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