Inheritance Tax Planning
When leaving assets in your Will you need to make sure the estate won’t have to be sold to pay inheritance tax. This is where prudent inheritance tax planning now can benefit your estate after your death.
Inheritance Tax is paid if a person’s estate (their property, money and possessions) is worth more than £325,000 when they die. This is called the ‘Inheritance Tax threshold’. The rate of Inheritance Tax is 40% on anything above the threshold. The rate may be reduced to 36% if 10% or more of the estate is left to charity.
As well as considering opportunities to reduce inheritance tax, effective inheritance tax planning should take into account the practicalities of paying inheritance tax and releasing assets to your chosen beneficiaries.
The complexity of inheritance tax law provides substantial planning opportunities. Effective planning should take into account a number of key principles:
- Focus first on your objectives – don’t let reducing inheritance tax overrule common sense, or your wish to take into account the financial needs of different family members and other potential beneficiaries.
- Keep your planning as simple as possible. Bear in mind that tax law – or your personal circumstances – can change, and complex schemes may be difficult and expensive to unravel.
- If you can afford it, look for opportunities to reduce the value of your estate – but don’t give away more than you can afford to. Once assets have been given away, they may be gone forever. For example, your children may decide that they do not want to support you in your old age, or themselves lose control of assets in a divorce.
- Early planning offers the greatest opportunities. The sooner you can give away assets, the more likely you will survive the gift by at least seven years.
- Even late planning is better than nothing – for example, ensuring that you have used up your annual gift allowances.
- Don’t take risks you cannot afford. A mix of different strategies may be an effective way of protecting against such risks.
- Ensure that you take into account the full tax picture. For example, disposing of assets during your lifetime may give rise to a Capital Gains Tax (CGT) charge that offsets or even outweighs any likely inheritance tax saving.
- Consider the long-term view. Assets that your beneficiaries will receive may in turn form part of their estates when they die – and be liable to inheritance tax then. Skipping a generation (ie giving gifts to your grandchildren rather than your children) may be an option for overcoming this.
Our Inheritance Tax Planning team can help you minimise the amount that is paid. Contact us for advice or to make an appointment to discuss further.