Your legacy and inheritance
When you pass on, you want to make sure that you leave as much as possible to your children.
We all have this goal, but what if the tax man claims a lot of your money?
If that’s the case, then your children will get significantly less than you hoped.
To prevent this type of scenario, you need to make sure that you are familiar with the ins and outs of inheritance tax.
You’ll find inheritance tax calculators online that can provide you with an idea of how much you could be expected to pay.
The good news is there are a few ways to minimise the inheritance tax on what you’re leaving behind.
So, let’s look at some of the possibilities.
First, though, we need to make sure you understand the rules of inheritance tax.
What are the inheritance tax rules?
Your inheritance tax will be paid by whoever is dealing with the estate after you die.
If you have a will already, this will be the executor.
The amount owed will be provided directly to HMRC.
Inheritance tax is charged at a rate of 40% of the amount that is above your threshold.
The current threshold for IHT is £325,000 per individual.
If you are married, your threshold doubles to £650,000.
This will only be the case if you are planning to leave your entire estate to your partner when you die.
An example then would be an estate worth £600,000 with a threshold of £325,000.
If this is the case then the amount you pay would be £110,000 for inheritance tax.
That’s a sizeable amount and it’s no wonder people search for ways to reduce this cost.
There’s a great perk if you’re married though.
If your estate amounts to less than your threshold, then the amount that is left over will be transferred to your partner.
This means that they can have a threshold of anywhere up to £900,000.
Other aspects can impact the amount of your threshold as well.
Are you planning to give your home to your children?
This can include anyone from adopted children to grandchildren and will push your threshold up to £450,000.
These rules and rates are the same across the UK.
However, there are slight differences.
For instance, in Scotland, the exemptions due to money given to partners or charity must be calculated on the basis that any entitlement from the estate will be fully claimed.
Are there any exemptions?
There are a couple of exemptions to these rules that might be relevant to you.
For instance, the value of your state could be far below the £325,000 threshold.
The value of your estate is usually completed by a relative after you die.
However, could make an estimate right now by thinking about the value of the property, the amount you have in investments, shares and other financial capital.
Alternatively, you might be leaving it all to your partner, spouse or a charity.
If either of these cases hold to be true, then you will typically not to be left with any inheritance tax to pay.
Gifts are also completely exempt.
Gifts involve passing over finances while you are still alive.
By doing this, you can bypass the IHT completely.
For these to be exempt, you need to live longer than seven years after completing the payments.
Otherwise, they will be added to the total sum of your estate.
The level of charge they will incur will depend on the number of years you lives.
Between six and seven years will leave them with an IHT of 20% while three to four years will cause 80% to be due.
It’s also possible to give £3000 away each tax year to ensure that it is exempt after you die or gives gifts away to anyone up to £250 a year.
Gifts can also include cash gifts for a wedding with anyone being entitled to provide £1000 to the happy couple.
What parents can give £5000 and grandparents can pass on £2500.
When are you liable to pay inheritance tax ?
As already mentioned, the amount is calculated by the executor of the will after you pass on.
The calculations will include any gifts you have made in the last seven years.
The full inheritance tax must be paid within six months from the end month when you passed on.
It can be quite a complicated process including freeing funds from savings or assets in an estate.
You may also find that if the money is in property, the tax is paid based on monthly instalments over ten years.
However, in this case, interest is added on, and as such, it can be even more expensive.
Inheritance Tax and Property
It’s possible that you have property abroad such as a second home in Spain or Australia.
There’s good news on this front because inheritance tax is only paid on your UK assets.
This means that if you have property outside the UK, it will be exempt and will not be included in your IHT calculation.
That also includes overseas pensions and any investments that you could have over there.
However, this will only occur if you have not lived in the UK for 15 of the past 20 years.
If you have had a permanent home in the UK at any point during the last 3 years of your life, you will be considered domiciled in the UK by the HMRC and any property will be added to your IHT.
Of course, if you have property abroad, your biggest concern should be that you’re going to be taxed in two different countries.
This can be bypassed through double taxation conventions.
For instance, if you only a property in Spain and you pay tax on this, it can be deducted from the IHT that you will pay in the UK.
In contrast, you could have purchased a second home in Australia where there is no inheritance tax.
However, the HMRC can still charge for this as part of your international estate.
Ultimately, if you are living in the UK when you die, then you will need to pay inheritance tax on all your estate including any second homes across the world.
Planning for inheritance tax
There are various ways to make sure you are planning and prepared for inheritance tax.
You should certainly make sure that you are writing a will.
A binding legal document, a will ensures that your estate is handled the way you wish when you pass on.
This will mean that money is given to the individuals or corporations or organisations that you have decided upon.
Some exemptions from HMRC
It’s also the best way to take advantages of the exemptions provided by the HMRC.
For instance, you can guarantee that ten percent of your estate does go to charity.
By doing this, you can reduce the level of IHT that you will have to pay.
Do you want to take advantage of the exemption related to gifting your property to your children?
You can again handle this through the careful planning of your will and make sure that is explicitly stated.
For a will to be binding it does need to be handled by an expert who is qualified.
Writing your will yourself leaves it open to loopholes.
Some people will use their life insurance policy to handle their IHT.
Life insurance can provide the capital you need to cover the cost of your IHT completely and make sure that you do not have to worry about that interest rate when the IHT is drained out of a property you owned.
You may also want to think about placing your estate in the hands of a trust.
A trust can control the estate completely and make sure that when you die your finances are handled correctly.
A bare trust can be completely exempt from IHT if you are alive for seven years after completing the transfer.
While the assets of a trust are held by a trustee, they go to the beneficiary.
This can be your children or spouse or anyone else, and they will have all the rights to the assets included as well as any income.
If a trust is set up through a will, then it will be up to the trustee to make sure that the IHT is fully paid.
You might also be wondering what happens if you leave your property and your children sell it on.
In cases like this, they will be expected to pay a capital gains tax.
However, this is only due on any amount above the value of the property when it was inherited.
There are deductions as well including a personal allowance and any costs they have to spend to sell the property.
Inheritance Tax Planning Service
Do you need help planning for your inheritance tax?
Get in touch with Universal Accounting to discuss our inheritance tax planning service.Contact us