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Inheritance tax – how to be prepared

19 Apr 2021

inheritance tax

It is natural to want to pass on your estate to your children when the end comes but having to pay inheritance tax (IHT) can drastically reduce the amount of your estate which ends up with your family.

It is natural to want to pass on your estate to your children when the end comes but having to pay inheritance tax (IHT) can drastically reduce the amount of your estate which ends up with your family. In 2018/19 HMRC was paid a whopping £5.3bn through inheritance tax*.

In this blog the Generation Wealth Management experts look at what can be done to help you ensure you are able to keep hold of the right amount of your estate.

The first step would be to work out what your potential inheritance tax bill could be. There are numerous calculators available to work this out, a simple one can be found here. This will quickly and easily work out your potential worst-case scenario.

Inheritance tax – our top tips

Make a current will

Making a will is an important part of estate planning. Without a current your assets will be distributed according to intestacy rules. If you have specific ideas about who you would like to inherit which assets then you should think about writing a will. Forethought when writing a will can help to open your eyes to your potential inheritance tax bill.

There is no tax paid on assets inherited between spouses, but all assets not left to a husband/wife will be liable.

Be aware of the inheritance tax threshold

The inheritance tax nil-rate band – or the inheritance tax threshold as it is also known – for individuals is £325,000. This nil-rate band is transferable to a spouse or civil partner upon their death, equating to a total nil-rate band allowance of £650,000 for couples.

There is also an additional main residence transferable allowance of £175,000 which can in some instances allow individuals to avoid inheritance tax on property.

Could you gift your assets?

If you are in a position to give your assets away – and you live for a further seven years – then those gifts remain free from inheritance tax. Each year you are also able to give inheritance tax exempt gifts totalling £3,000. In the event of your child getting married you can also give £5,000 as a wedding gift, safe in the knowledge that it is free from inheritance tax. If you are able to gift your wealth this can be a useful way to limit the impact of inheritance tax upon your death.

Put your assets into trust

Assets left in trust do not form part of your estate and are exempt from inheritance tax, although the seven year rule still applies, so assets must be in trust for seven years before they become exempt from inheritance tax. Assets can be placed in a trust for children or grandchildren once they come of age.

Retain the income from your assets in trust

If you take advantage of an ‘interest in possession trust’, you can still retain the income from the assets held in trust, whilst avoiding the inheritance tax implications.

Leave money to charity

Any money left to a charitable organisation will be free from inheritance tax.

Spend it

You worked long and hard to build up your assets and should ensure you enjoy them to the full. Many people sacrifice their retirement to leave money to their families, only for them to be taxed 40% for the privilege.

If this has opened your eyes and you would like to get a clearer picture of what inheritance tax will mean for those you leave behind, speak to one of our experts.

N.B The information in this blog is based upon our understanding of tax legislation and rules in April 2021. These may be subject to change in the future. The benefits of any planning will depend upon your financial circumstances”.

* • Inheritance tax receipts UK 2020 | Statista

 

 

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