Inheritance tax: an introduction for clients
I am often asked if I can provide a ‘client-friendly’ introduction to inheritance tax.
Here is my version and it gives you an overview of the philosophy we use when making recommendations to clients and professionals.
Inheritance tax is a little-known but far-reaching tax. To help you ascertain if it could be a problem for you, here is a brief introduction to inheritance tax:
What is inheritance tax?
Inheritance tax (IHT) is, broadly, a tax levied on any gifts or legacies an individual makes, directly or indirectly, to other people.
It is most commonly paid when they die, but it can also apply in respect of certain transfers of assets during life.
It is a mistaken assumption that a person needs to be particularly wealthy to incur an inheritance tax liability.
If the total value of all their possessions, less debts and liabilities, minus any available exemptions exceeds £325,000 then anything over that amount is taxed at 40%.
This figure applies if they are single or divorced.
It can be increased to £650,000 in total for people who are widowed, but more of that later.
(Please note that the Conservative government have announced plans to increase this to £1 million when the main residence is left to children or grandchildren.)
Certain lifetime gifts can be made that are exempt from inheritance tax.
If a person gives money away during their lifetime, it will reduce the amount taxable on death.
The more important exemptions include the spouse exemption (transfers between spouses or civil partners), the annual exemption (£3,000 per tax year) the small gifts exemption (up to £250 per person) and the marriage/civil partnership gifts exemption.
In addition, any gifts or bequests in favour of certain organisations are free of inheritance tax, such as a gift in favour of a registered charity is exempt.
How to mitigate inheritance tax
For most people, the lifetime gifts provisions are not be enough and a substantial potential tax liability could remain.
For example, if a married couple have a house, possessions and investments worth £850,000 their potential inheritance tax bill is £80,000.
For a single or divorced person, it will be a staggering £210,000.
But there are still steps that can be taken to ensure the tax bill at the end of the day will be minimised.
First and foremost, people need to decide who should benefit – and then make a will. This ensures that their intentions are clear as to who should benefit from their estate.
Transferring the nil rate band
The law of inheritance tax allows an individual to transfer their nil rate band to a surviving spouse or registered civil partner.
This allows married couples or registered civil partners to save £130,000 in tax (£325,000 @ 40%), but does not benefit anyone who is divorced, single or co-habitating with another person.
The simplest method for someone to reduce the value of their taxable estate is to give away surplus cash and assets, then to survive for a period of seven years.
This is the period specified by the inheritance tax rules.
However, people are understandably unwilling to make gifts during their lifetime that might be frittered away by the recipients. The answer could be a trust arrangement.
Use of trusts
There are a number of trusts, which can be used, the suitability depending on the precise requirements of the individual and the tax consequences of the trust.
Broadly, by moving some of their assets into the shelter of a trust, it will protect those assets from inheritance tax provided that the donor lives for seven years after the transfer.
This is a tried and trusted method of meeting an inheritance tax liability, whereby a life assurance policy is taken out to ensure that the money is available, on death, to meet the inheritance tax bill.
Underwriting is a requirement, as it is for any life assurance arrangement, and if the client is in poor health for their age, this may not be a viable proposition.
This is only a brief introduction to inheritance tax, but the important message to clients is don’t leave it too late to start planning.
For help and advice please do not hesitate to contact us @HoskinFinancial
THIS BLOG PROVIDES INFORMATION, IT IS NOT ADVICE. ANY OPINIONS ARE GIVEN IN GOOD FAITH AND MAY BE SUBJECT TO CHANGE WITHOUT NOTICE. OPINIONS AND INFORMATION INCLUDED WITHIN THIS EMAIL DO NOT CONSTITUTE ADVICE. (IF YOU REQUIRE PERSONAL ADVICE BASED ON YOUR CIRCUMSTANCES, PLEASE CONTACT US AT HOSKIN FINANCIAL