Most people are quite surprised to discover just how much they are worth. How often have you heard someone say, “I’m worth more dead than alive”?
Britons will pay almost £2 billion more in inheritance tax over the next five years than previously thought, official estimates have revealed.
It will rise from an estimated £4.7 billion in 2016/17 to £6.2 billion in 2021/22 – an increase of around a third.
Rising house prices and a booming stock market were named as the causes of the increased tax haul, according to the Office of Budget Responsibility (OBR).
People spend a lifetime building wealth to provide for the later years and then passing on any remaining assets to their children or other family or friends, it is somewhat unfair that without careful planning many families face a huge inheritance tax bill. More people are likely being dragged into paying the tax due to a growing economy.
In recent years, it has become increasingly difficult to avoid this hated tax with a host of measures introduced by the government designed to block many of the popular methods used by families attempting to plan for the inevitable.
Inheritance Tax (IHT) is levied on property and financial gifts that are passed on when someone dies, with 40 per cent being the standard rate.
With the introduction of the residence nil rate band (RNRB) this will provide a little comfort if you own a residential property and its passed directly to your children.
The starting rate of RNRB is £100,000 in 2017/18 rising to £175,000 by tax year 20/21 thereafter increase by CPI, However, we are stuck with the nil rate band (NRB) of just £325,000 until at least 2021.
What remains true is that despite all the changes, Inheritance tax is predominantly paid by the modestly wealthy members of society who suffer the greatest proportion burden compared to their wealth.
As I mention property prices have increased over the years and clients of modest means can find themselves asset rich and cash poor, giving away everything now is just not an option for some.
The key to minimising this tax is to either “die poor” or “plan ahead” most of us find the first option somewhat unpalatable and very difficult to achieve without a remarkable sense of timing. The wealthiest member of society tends to build IHT planning into their succession plan leaving the moderately wealthy to pick up the bill.
In my experience a great deal of the modestly wealthy just do not seem to use this type of planning to any great effect, trusts have been around for hundreds of years and should be part of the everyday planning – it’s not an exclusive club for the super wealthy.
What are the options;
The simplest is by placing life cover in trust for your beneficiaries, I come across clients everyday who have not been advised to do so or are totally unaware of the consequence on death from and inheritance tax point of view.
You can assign assets in to a trust and avoid paying 40pc tax, careful planning is required – any assets passing into some types of trusts attract an entry charge of 20pc above the NRB as well as periodic charge every 10 years thereafter which is a maximum of 6pc.
A married couple can reduce the tax on their estate by £260,000 every 7 years by using their NRB planning (£325,000 X 2 X 40%) in addition to using various annual gifting allowances currently available.
On death, it may be more beneficial to use up the NRB on first death due to the limit being frozen until 2021- in addition if the surviving spouse was to remarry this valuable limit would be lost as only a maximum of two NRB limits can be used on second death.
In addition, gifting capital will reduce the potential IHT this would be a personal exempt transfers (PET) these will be out with your estate if you survive 7 years however brought back into the calculation if you died prior to this.
One of the most valuable and least use IHT planning is gifting out of income HMRC do not have an issue if the gift is around one third of your income, however they will dig a bit deeper if the figures are greater than this;
Under the current rules an unlimited amount can be given away if;
1.they are part of the normal, habitual or typical expenditure of the transferor.
2.taking one year with another, they are made out of income (i.e. not out of capital) and,
3.the transferor is left with sufficient net income to maintain his or her usual standard of living.
Gifting out of income is unlimited, however I would advise that the use of HMRC- IHT403 form to support and evidence the gifts- they will ask to see evidence to confirm this was not a capital gift, good record keeping is the order of the day.
However, you tackle your IHT liability, it’s also essential to review your strategy regularly. Making sure your plans are on track every couple of years or if your circumstances change – for example, if you receive a windfall or you get married – will ensure you leave as much as possible to your loved ones rather than the taxman.
Don’t leave loved ones with a large and unnecessary IHT bill to pay Without careful planning and advice, your loved ones could face an IHT bill they would need to pay before your estate is settled, leading to additional stress at a time when they need it least. Taking steps now could make a big difference to your loved ones in the future.