Making sure that you have made plans for after you’ve gone will give you peace of mind. But providing your family with lasting benefits means taking preventative action now!
Protecting your estate is ultimately about securing more of your wealth for your loved ones and whilst it’s not nice to think about, it’s important to plan for what will happen after your death – to make the lives of your loved ones much easier.
The IHT threshold, or Nil Rate Band (NRB), is fixed until 2020/21 at £325,000. So, you don’t have to be that wealthy for your estate to be liable for Inheritance Tax (IHT) and it isn’t something is paid only on death – it may also be paid on gifts made during someone’s lifetime.
On death, any assets valued over the NRB will be subject to tax – currently at 40%. This will includes any gifts made within seven years of your death.
Where a person dies and leaves at least 10% of their net estate to a qualifying charity, a reduced rate of 36% IHT can be payable.
It is possible to pass on any unused NRB belonging to a spouse or registered civil partner (first death) to the surviving spouse or registered civil partner.
Additional Nil Rate Band – From 6 April 2017, the Government will be introducing an Additional Nil Rate Band (ANRB)
This will start at £100,000 and increase by £25,000 each tax year until it reaches £175,000 in 2020/21, when it will increase each tax year by the Consumer Price Index (CPI).
The ANRB will be available where you pass your house to your children, grandchildren or great-grandchildren. It will also be available if you downsize or cease to own a home as long as the replacement is passed to your children, grandchildren or great-grandchildren.
It will start to reduce if your net estate is more than £2 million and will reduce by £1 for every £2 it is over. As with the NRB, the ANRB is transferable between spouses and registered civil partnerships if unused on first death.
Making gifts – If you can afford to make gifts during your lifetime, this can reduce your IHT liability
You can make a gift of up to £3,000 a year without any IHT liability, and if you don’t use this whole allowance it can be carried forward to the next tax year. You can also make gifts from regular income or give gifts of up to £250 a year to any number of people with no IHT liability.
Some larger gifts can come with potential tax implications and should be discussed with your financial planner or tax adviser before you consider these.
You could also consider taking out a life insurance policy written in trust so that the proceeds from the policy can be paid directly to the beneficiaries to help pay any IHT due.
Formal Trusts can be appropriate for people with complex family situations or where they want to formally gift money in their lifetime, reducing IHT on death.
The sooner you start planning, the more you can do
Whether you want to provide for the next generation or leave a charitable legacy when you die, or you simply want to minimise an IHT bill, the sooner you start thinking about this the more you can do.
For most people, your financial affairs will be constantly changing, and therefore it is very important that your financial strategy is able to adapt similarly to changes in your situation.
At Magenta, we are able to guide you through the complex area of Inheritance Tax and help you to put a strategy in place to meet your wishes for your loved ones – contact us today!