The world lost several greats in recent weeks, not least with the relatively early deaths of the influential musician David Bowie and much respected actor Alan Rickman, both of whom had battled long illnesses. It cannot be easy to stare death in the eye, nor to accept that you need to organise your estate and make preparations for the end of your life. However, those who have plans in place often spare additional pain and distress to the loved ones they leave behind.
When it comes to financial planning, many people worry about organising their finances properly and one of the main concerns is to minimise the amount of Inheritance Tax (IHT) payable on their death, leaving a greater share of the estate to pass on to their heirs. Here are some points to consider if you are thinking of talking to your financial adviser about IHT.
There are a number of ways to mitigate IHT. These all suit different individual’s needs, but can include: Spend it, give it away, give it to charities or political parties, insure against it (insurance doesn’t reduce an Inheritance Tax bill, but can provide the money to pay it) or use your pension as a means of passing the money onto future generations.
Spend it: Clients are often surprised when we say spend it, but it Is the obvious way to reduce your Inheritance Tax liability. Each person has an IHT ‘allowance’ of £325,000 currently and any assets above this threshold on their death are taxed at up to 40%. The obvious way to reduce your IHT bill is to spend any excess savings that you are confident you won’t need in the future either to provide an income or to access capital.
Before you hit the shops, it is important to note that if you are married or in a civil partnership, then on death, any of your estate which passes to your spouse does so without there being any Inheritance Tax to pay. This effectively doubles the amount the surviving partner can leave behind tax-free without the need for specialist Inheritance Tax planning. Also important to note is that what you are spending on matters – spending on holidays will reduce the value of your estate, but spending on paintings or property for example won’t necessarily!
Financial Gifts: If you decide to give it away, then you have an individual allowance of £3,000 which can be gifted each year without any tax implications. This is known as the annual exemption. You can give away more, but if you die within 7 years then the additional money gifted could be subject to Inheritance Tax.
There are other gifts which do not incur IHT – such as monetary gifts made on or shortly before a wedding/partnership ceremony (different limits apply to different individuals) or individual gifts of up to £250 per year (of which you can make any number of, to different individuals).
What many people don’t know is that you can also gift any amount from your regular income which doesn’t change your normal standard of living. So if you earn £40,000 a year and your expenses are only £20,000, you can gift the surplus money.
Many parents and grandparents worry about the giving of money to young relatives or to their married children if they have concerns about the security of that marriage. It is possible to gift money into a trust, but different trusts offer different benefits so it is important to seek advice. Your priority may be for the beneficiary to receive the monies on your death, or when they reach a certain age, it may be to reduce the value of your estate for IHT purposes immediately (which some trusts can do), or you may feel it is acceptable to use a trust which will only see the assets outside of your estate if you survive a full seven years.
Any financial gifts should be recorded and given with a signed letter which states that moneys given are a financial gift. This helps to clarify any issues regarding financial gifts with HMRC after death.
Give it to Charity: There is no IHT payable on gifts made to a charity; thus if you leave 10% of your estate to charity the tax due on the estate overall would be more equivalent to 36% than 40%. For those with a large IHT bill, giving money to a chosen charity and not HMRC can be a preferred choice.
Buy an Insurance Policy to Cover the Bill: A Whole of Life policy is an insurance policy which will provide a lump sum on death to beneficiaries. This type of policy is often used as a way of providing the funds to your beneficiaries to pay an expected inheritance tax bill. For a couple, a whole of life policy is typically set up on a ’joint life second death’ basis, paying the benefit only when the second person in the couple dies. For an individual, it would therefore be only on their life.
Ensuring the policy is written under a suitable trust means that the money paid out would not be subject to IHT. When taking out a whole of life policy, guaranteed premiums, which won’t rise in price in later years, should be carefully considered. Many Whole of Life policies are sold with reviewable premiums which can result in significant increases to premiums over time. Elderly policy holders can suddenly find premiums go up by as much as 50% and feel financial pressure to cancel policies, losing everything they have paid up to that point. With a guaranteed premium policy, there are no nasty future surprises.
Use your pension: Under the new pension freedoms, it’s now possible for certain types of pension funds to be passed down or inherited by successive nominated individuals. On the death of an individual with pension benefits held in a drawdown fund, the value of the pension will not form part of their or a successor’s estate for IHT purposes. This can be a useful IHT planning tool where, for example, funds are not required immediately, as these can be cascaded down to dependants and other family members, who can continue to benefit from the tax exemptions provided by the pensions wrapper.
If you are considering making changes to your financial arrangements to better prepare for Inheritance Tax then it is important you seek financial advice. The above article is for information purposes and should not be treated as advice. Individual circumstances should always be considered prior to purchasing any financial products. For further information please contact your Financial Planner.
Any views expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. The Financial Conduct Authority (FCA) does not regulate taxation and trust advice or legal advice – investments recommended as part of tax and trust advice are however regulated by the FCA.