Do I need to worry about Inheritance Tax (IHT)?
Yes, if your estate is worth more than £325,000.
It is very important to be aware of what IHT you may have to pay on your death as your family may be in for a bit of a shock when they suddenly realise they have to pay thousands of pounds before they can receive their benefit.
The more aware you are of IHT, the more likely you are to be able to tax plan and potentially reduce any liability, possibly so that no tax is payable, but the majority of people aren’t sure how to go about it. This is where we can help.
The current IHT allowance is as follows:
- Single person: £325,000 tax free. Anything above this is taxed at 40%.
- Married or Civil Partnership: £650,000 on second death tax free (providing you haven’t used any of your allowance on first death). Anything above this is taxed at 40%.
For Example: Let’s say you are a divorced person with an estate that is worth £500,000. £325,000 is exempt of tax upon your death. But the other £175,000 is going to be taxed at 40% therefore £70,000 is being taken from your beneficiaries as IHT. That’s £70,000 that your family is no longer going to receive, £70,000 that you have already paid income tax on to earn. Infuriating is it?
This is a prime example of why you need to be aware of possible IHT issues upon your death.
Ways in which you can reduce your IHT liability:
- Make a Will – A properly written tax efficient Will should make use of Married couples and Civil Partners exemptions.
- Inheritance exempt investments:
- Alternative Investment Market shares (AIMs)
- Enterprise Investment Schemes (EIS)
- Charitable gifts – gifts to a UK registered charity are free of IHT.
- Trusts – Certain trusts can be established to pass money out of your estate whilst still affording you some of control and access.
- You could gift money or parts of your estate before you die meaning upon your death, these gifts will not count as part of your estate and therefore be exempt from IHT. The drawbacks of gifting parts of your estate is that you must live for 7 years after making the gift for the gift to be considered a exempt transfer and, of course, once you make a gift you yourself are no longer able to benefit from it.
We work with a panel of Independent Financial Advisors (IFAs). Investment advice is regulated so we recommend qualified IFAs who have access to the whole of the financial market.
If you need any advice on how you could potentially avoid IHT or reduce your IHT liability then please do not hesitate to contact us. We will be more than happy to help you with whatever questions you may have.