You are likely to have worked hard your whole life to accumulate your assets and you want to leave as much as possible to your loved ones and not the tax man. You may or may not be aware that Inheritance Tax is typically 40% of any of your assets over the value of the Nil Rate Band of £325,000. Each person gets a Nil Rate Band so couples can shelter £650,000 from Inheritance Tax. The majority of your assets are inside of your estate for Inheritance Tax purposes such as your house, cars, cash, ISAs.
If you leave your main residence to a direct descendant then you can claim the Residence Nil Rate Band on top of the Nil Rate Band. This is £175,000 per person so each couple can shelter up to £1,000,000 from Inheritance Tax if they leave their home to a direct descendant.
Below are some tips to reduce or even eliminate your Inheritance Tax liability over time.
Step 1 – Use your tax reliefs and allowances
There are various tax reliefs and allowances that you can use to reduce your income tax bill such as salary sacrifice and increasing pension contributions. However, it is surprising how few people are aware of the full allowances that they are entitled to.
Inheritance Tax Planning is something that should be done in advance in order to make the most of all of your allowances over time. The more that you put off Inheritance Tax planning, the less options that will be available to you and this means that your loved ones will have to pay more tax when you die.
Large gifts are subject to the ‘seven year rule’ which is where Inheritance Tax due reduces each year and after seven years it is completely outside of your estate so no Inheritance Tax will be due. The younger you are when you make gifts like this, the more likely you are to survive seven years and pay no Inheritance Tax.
Step 2 – Make gifts from your excess income
A commonly under-utilised Inheritance Tax allowance is gifting from your excess income. If for example you receive income of £2000 per month and you only spend £1000 per month on your outgoings then you can gift up to £1000 per month from this excess income. This will be immediately outside of your estate for Inheritance Tax purposes. To qualify for this exemption it is important that you document the gifts and that the gifts are regular in nature, for example monthly or annually. There must be no gaps in the records and the gifting must not harm your current standard of living.
At Four Wealth Management, we offer an excess income plan which is in trust and immediately outside of your estate, all of the paperwork and recording of the gifting is kept for you on your behalf. You can book in a no-obligation meeting with a financial adviser online or call us on 0117 973 0500.
Step 3 – Make sure your estate is distributed how you choose
To make sure that your estate goes to who you choose and also when you choose it is very important to have an up to date Will in place.
Your Will can determine who your beneficiaries are and when they receive your assets. Some people choose to set up a trust through their Will.
If a person dies without a Will in place, then the estate will be shared according to specific rules and only certain people are able to inherit the assets. This also means that some of the assets are likely to automatically go to the government.
You should make sure to review your Will every few years as it is likely that your circumstances will continue to change throughout your life.
You should note that pensions are outside of your estate and therefore are not included in your Will. To nominate who you would like your executors to distribute your pension to, you should fill out an Expression of Wish form. You need to complete one form per pension you have with your pension provider so they can keep this on file.
Review your estate planning now
To discuss estate planning and mitigating an Inheritance Tax liability, you can book in a no-obligation meeting with a financial adviser online or by calling us on 0117 973 0500. Meetings can be at your home address, at one of our offices or on zoom.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.
Will writing involves the referral to a service that is separate and distinct to those offered by St. James’s Place. Wills along with Trusts are not regulated by the Financial Conduct Authority.
