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Focus on inheritance tax

by | Apr 16, 2019 | Inheritance tax

Once thought as a tax for the wealthy, inheritance tax is now something that an increasing number of us will be affected by. Rising property prices have driven up the value of estates faster than increases in the tax-free threshold, meaning that many more estates are now subject to inheritance tax.

The government has responded to this shift with the introduction of an inheritance tax break in the form of an additional tax-free allowance on the family home. We also look at some of the common reliefs (and traps) surrounding inheritance tax and outline how inheritance tax can affect individuals in a common scenario.

Tax note: For simplicity, although we refer to spouses, all inheritance tax rules apply equally to civil partners. Inheritance tax is a vast and complicated area, so take professional advice on your own circumstances.

What is inheritance tax?

Inheritance tax is a tax on death on the value of an individual’s estate, and the tax is payable by the estate before any funds are passed to beneficiaries. Currently the basic nil-rate allowance is £325,000, above which tax is charged at 40%. For example, a £500,000 estate will pay 40% tax on £175,000.

A word on wills

Making a will is one of the most important things you can do to ensure your estate goes to who you want it to. So, firstly, make sure you have a will, and secondly, check it’s up to date. Change is constant; inheritance tax rules, families and assets all change and so plans from even a few years ago can quickly become out of date.

It’s your money; spend it!

OK, it may not be popular with the children, but reducing the value of your estate can reduce your tax liability. And doesn’t it just sound like fun?

On a more serious note (and one that will be a lot more popular with the family), you can give away up to £3,000 each tax year without problem, plus gifts out of income, wedding gifts (up to £5,000 by parents, £2,500 by grandparents and £1,000 by anyone else), and small gifts of up to £250. Gifts to your spouse are always exempt as they will then simply form part of their estate.

Pensions

Pensions can be an effective way to pass on funds tax efficiently. If you die before the age of 75, funds in a money purchase pension scheme can be passed tax-free to any beneficiary. After age 75, pension benefits are taxable on the beneficiary at their marginal rate of income tax. For more details speak to your IFA.

Trusts

Trusts can be complicated but can be used to reduce an inheritance tax bill and give you control over how and when your assets are passed to future generations. We may look at the use of trusts in a future edition.