Along with good genes, have you ever considered what else you’ll leave behind when you’re no longer around? This is one aspect of financial planning which clients are hesitant to discuss, says ROSS HUTCHISON
Inheritance Tax (IHT) is the tax payable on your estate upon death and the ‘estate’ can include money, property and anything of high value.
The UK Government has frozen the current threshold to £325,000 since 2009. Note that since 2009, the cost of living and property prices has risen, so whilst we may think a ‘tax freeze’ is nice, it does mean that more of us could be faced with a significant IHT bill.
For example, if the total value of your estate is valued at £500,000 then your next of kin are allowed £325,000 tax-free. They would pay tax on the rest, which at 40%, works out at £70,000.
No tax is usually paid if your estate is less than £325,000.
So, where to start?
Write a will
A lot of IHT issues can be avoided by ensuring that you have a written statement of how your assets are to be divided up in the event of your death. It is estimated that just over half of all eligible adults do not have such an arrangement in place.
Without a will, you might assume that everything will be divided up fairly by your family if everyone gets along. Which is wishful thinking(!). Now imagine what may happen if your family are divided. Or if a family member needs additional care once you are gone.
A financial adviser will be able to advise you where the following exemptions would apply.
Gifts to your spouse or partner are exempt provided you are still married (up until your death) and you are both UK residents.
You can gift up to £5,000 if one of your children is getting married.
Each tax year, you are allowed to gift a certain amount which currently stands at £3,000. You are also currently allowed to carry over one previous tax year, meaning a total of £6,000 can be gifted.
Small gifts exemption
You can gift £250 as many times to as many people as you want (however, you cannot combine with another exemption to the same person)
If you arrange to gift 10% of your assets to a charity, the 40% tax bill drops to 36%.
The seven year rule
No tax is payable on any gifts given provided you live for seven years after giving them. If however you do pass away, then a sliding tax scale, known as ‘taper relief’ applies.
‘Normal expenditure out of income’
This is a very useful exemption, providing that you meet three conditions.
1. It is made from your income
2. It does not affect your living conditions and standard of living
3. It is normal expenditure
If you are self-employed and have been paying a percentage of your grandchildren’s school fees regularly, that would be considered ‘normal’. As would making regular payments into grandchild’s ISA. A one-off purchase of a car for a grandchild would be harder to justify to HMRC.
Gifting your ISA to your spouse or partner avoids giving them a tax bill. Gifting to another family member, sadly, means the opposite.
Using a trust
By setting up a trust to lower your IHT bill, your assets are no longer your own and are the responsibility of a third party, meaning IHT is avoided. But it may trigger an income tax or capital gains tax bill.
Depending on your needs, there are several options when it comes to setting up a trust.
Note that setting up a trust, and the type of trust you decide on can also mean you’ll need help from a solicitor.
Apart from your written will, it would be a good idea to make your family’s life a bit easier by ensuring that anything else of value you wish to gift should have appropriate paperwork. This can include property deeds, repairs or valuations on high value assets. This can be especially useful when proving the worth of said assets.
An alternative (and much easier) method of lowering any potential bills for your next of kin is to spend your money. And yes, it’s one method that gets overlooked. But if you’ve already helped your family financially or if you don’t have any other financial commitments, then why not? After all, it is your money and yours to do with what you will.
Hopefully, with these ideas in mind, you can rest easy knowing that your legacy for your loved ones is not just a large tax bill (!)
Ross Hutchison is a financial adviser at Reddington Wealth Management