When you die you may be liable to pay up to 40% Inheritance Tax (IHT) on the value of your assets without adequate Estate Planning.
An increasing number of people are faced with a mounting Inheritance Tax (IHT) liability, prompted by the rise in the value of residential property.
What makes up my ‘Estate’?
You can value your estate by establishing the ‘market value’ (realistic selling price) of assets. You get the value of the estate by adding up the value of all the assets and gifts you must include, then taking off any debts.
An asset is anything owned with a value (this means it’s worth money or could be sold), including:
- money in a bank or building society account
- property and land
- personal belongings, eg jewellery
- pensions that include a ‘lump sum’ payment on death
- a payout from a life insurance policy
- jointly owned property, bank accounts or other assets
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How much IHT will I have to pay?
There’s no Inheritance Tax to pay if either:
- everything passes to the spouse or civil partner of the person who died
- the value of the estate is less than the Inheritance Tax threshold
Inheritance Tax is paid when the estate’s worth more than the threshold which is currently £325,000.
It was therefore welcome news for families when, in the summer budget of 2015, George Osborne announced a new ‘family home allowance’ available to those leaving their main residence to their direct descendants (children, step children or grandchildren).
Introduced in stages over a four year period, with a limit of £100,000 from April 2017, rising to £175,000 per person in 2020, the family home allowance will be available in addition to the £325,000 tax free allowance.
When fully implemented (in 2020), each parent will be able to leave £500,000 in assets that include a ‘family home’ component of at least £175,000. It is important to note that the allowances can be passed from one partner to another on death. To elaborate, when the first partner dies, their allowance can be transferred to the surviving partner, as a result they will have an allowance of £1 million. In a situation where a property is worth over £2 million, the family home allowance will be reduced by £1 for every £2 of value above £2 million. The individual allowance of £325,000 will not be subject to reduction.
How can Estate Planning reduce my IHT liability?
Careful Estate Planning utilising a variety of strategies can help to dramatically reduce the amount of tax you pass to the government when you die. A few examples are:
- Ensuring your will is up to date.
- Gifting assets.
- Utilising Trusts.
- Investing in specific investment products.
- Giving to Charity.
Tax is a complex matter, so taking good advice is essential as everyone’s financial situation is different and requires a bespoke planning solution.