Do we need to think about inheritance tax differently?
The world is changing. We can see it in the difficulties young people have getting on the housing ladder. Their pensions will not be as generous as their parents and grandparents.
I’m not saying don’t spend your money so you can give it all to your kids. No! It’s your money, do what you want with it. A bit of preparation now could save your family losing 40% of whatever you leave them.
An inheritance might once have been seen as windfall from a sad family loss. Now, this could be the thing that secures a financial future for the next generation. In the absence of owning property or having significant pensions built up.
Fact
Those born in the 1980s could receive inheritances double what those born in the 1960s received (Institute for Fiscal Studies).
Two reasons the trend will continue:
- Older generations are holding on to more wealth than their predecessors.
- Younger generations are not seeing their wages grow.
As inheritances grow, more families could pay inheritance tax (IHT) too. Around 1 in 20 estates currently pay IHT, but the chancellor froze thresholds in the 2021 Budget. So, more families could find they face an IHT bill.
How much can I leave before paying Inheritance Tax?
If the value of your estate is below £325,000, there’s not IHT to pay. This is known as the “nil-rate band”.
There’s another nil rate band if you leave your main home to a child or grandchild. Known as the residence nil-rate band. This can be up to £175,000.
So potentially you leave up to £500,000 without any IHT to pay. If you are a widow, you can use your late husband or wife’s nil rate bands. This means as a couple you could leave up to £1 million to family before IHT is due.
These nil-rate bands are frozen until 2026. This means that as the value of estate increases you are more likely to pay IHT. The standard rate of inheritance tax is 40%. So for every £100,000 liable to tax, your family will receive £60,000.
7 things you can do to minimise Inheritance Tax
- Annual Gifts
You can gift £3,000 each tax year free of inheritance tax. If you didn’t use last years, you can role it forward one year.
You can give away as many £250s as you like. But not to anyone you have gifted £3,000 to.
- Weddings
There are special allowances for gifting to those getting married. If it’s one of your children, you can gift £5,000. A grandchild, £2,500. Anyone else, £1,000.
- Your Income
Inheritance tax is a tax on your assets, not your income. So if you make gifts that come from your income (not depleting your savings or investments), that’s tax free.
The important thing here is that it has to be regular, and it can’t affect your lifestyle.
- Use a trust
Trusts can a way to remove certain assets from your estate, so they aren’t included for IHT purposes. In some cases, you can still receive an income from investments placed in trust. Trusts are complex and there are several different types! So it’s important to get both financial and legal advice.
- Leave some of your estate to charity
You can have a positive impact while reducing IHT by supporting charities. Donations made in your will to a charity are free from IHT. As a result, charitable gifts can bring the value of your estate under the thresholds. If you leave more than 10% of your entire estate to charity, the Inheritance Tax Rate will fall from 40% to 36%. In some cases, this means your beneficiaries will receive more from their inheritance.
- Take out a life insurance policy
This doesn’t actually reduce the tax bill. But it can provide a way to pay the bill. life insurance policy would pay out a lump sum on your death. You will need to pay regular premiums for the policy. The cost of which will depend on a variety of factors, including your health and lifestyle. It’s also essential the policy is placed in a trust. Otherwise the lump sum will become part of your estate and increase your IHT bill.
- Spend it
Enjoy your life now, do what you want when you want. It could bring the total value of your estate under IHT thresholds.
These are a few ideas on how you can organise your money to reduce future inheritance tax. There are many more options.
If you are thinking about how, you can make the most of your money and leave as much as possible for your family, let’s talk.
Book a call with me – HERE