Plan today to reduce tomorrow’s inheritance tax
Posted on 25th November 2022
More families are paying IHT
There is an inheritance tax threshold on the value of everything you own from savings to fine art before 40% IHT is payable.
The current threshold of £325,000 has been the same since 2009 and it won’t change before 2026. As house prices and inflation rise many more estates are likely to be above this level. In the tax year to 5 April 2020 Her Majesty's Revenue & Customs (HMRC) benefitted from £6.1billion in IHT which is an increase of 14% compared with 2019. The average IHT bill is now well over £200,000.
Planning ahead for IHT
There are steps you can take to minimise future IHT liabilities so that you can pass on more of your estate to your family.
Allowances – on top of your £325,000 allowance before IHT is paid you can also pass on a further £175,000 before tax if you leave your main home to your children or grandchildren.
If you are married or in a civil partnership and your spouse or partner dies and leaves their estate to you, then the benefit of their IHT allowance also passes to you. That means you could pass on a total of up to £1million to your children or grandchildren before IHT comes in to effect.
Investments – if you have a defined contribution or money purchase pension, it is usually free of IHT and can be passed on tax-free to your beneficiaries if you die before you are 75. If you die after you are 75, any money subsequently withdrawn from your pension pot by your beneficiaries will be taxed as income.
A pension is therefore a tax-efficient option if you are in a position to contribute to one. Holding on to your pension pot for as long as possible and spending other savings such as ISAs and other investments which would be included in your estate for IHT purposes could be a good idea.
Gifts – you can give up to £3,000 in tax-free gifts each year. You can also give small annual gifts of £250 to as many people as you wish such as grandchildren, for example. If your grandchildren get married, you can give them each a gift of up to £2,500 which won’t be included for IHT purposes.
You can also give gifts from regular income as long as it doesn’t affect your standard of living. This leaves your estate immediately and won’t be considered for IHT so you could contribute a monthly amount to a tax-friendly Junior ISA for each of your grandchildren for example.
Other gifts might be exempt if you live for seven more years after giving them. If you die within seven years IHT is paid on a sliding scale. You can take out insurance to protect gifts from future IHT but the policy must be placed into a trust or the payment could be added to your estate and incur IHT.
Something to think about
Planning to reduce the amount of IHT to be paid when you die is important, but you should also consider provision for yourself and your partner in your later years. It’s important to be aware that there are some strict guidelines on giving away property and assets when it comes to paying for care.
Any assets that you give away as gifts could be considered during a financial assessment for care. So, for example, if you considered transferring your home to your children it might still be taken in to account when your local authority looks at how much you should pay for your care. This also applies to gifts of other valuable assets, money or selling assets for less than they are worth.
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