UK inheritance tax can be a heavy burden on a family, especially so soon after the death of a loved one. But if you’re a married couple or part of a registered civil partnership, there are steps you can take to ensure that your family doesn’t end up paying more inheritance tax than is absolutely necessary after your death. All it takes is some dedicated estate planning, and documentation included in your wills. Today, we want to give you a very brief overview of what you can do to plan for inheritance tax and reduce the bill your family will receive after you have passed away.
Planning For Inheritance Tax On Death
The threshold for inheritance tax in the UK is incredibly low. It currently sits at £325,000 for the 2017/18 tax year. Anything under this amount is known as the ‘nil rate band’, because up to that amount the rate of inheritance tax is charged at 0. But above that amount, the tax man can charge 40% inheritance tax. But there are a few ways to ensure your family benefit from your estate, without having it calculated with inheritance tax.
The main focus behind this is gifts. The inheritance tax system in this country favours those who make gifts and bet on the surviving. So the more assets you give away during your lifetime, the less tax there is to pay on your death, providing that you live for at least 7 years after the gift was made. There is however a tax relief once you have survived 3 years, when the rate of tax applicable it is decreased, and continues to decrease year on year until you reach the 7-year mark. Gifting is a powerful way to use up your annual tax reliefs. However, it needs to be done correctly, to avoid getting caught out by assumption or hearsay, when the penalty for mistake can be disastrous, because you could end paying far more in tax and costs than you would have without it.
Gifts to your husband, wife or registered civil partner are also not calculated into your inheritance tax bill, if you are both UK residents. This type of gift has a 100% tax exemption, which is ideal if you want your spouse to be your primary beneficiary. The only catch with gifts is, that once gifted, you cannot continue to benefit from that gift. So, for example, you can’t gift your house to your child and continue living in it as your primary residence without compensating the “new owner” by a market rent that to live in that property you would charge, for example.
So with reference to the above, it’s important to note here that any large gifts you have made within 7 years of your death do not reduce your inheritance tax bill – in fact, they are added back into the pot and can increase it instead. Gifts are the perfect way to plan for and mitigate inheritance tax while you are still alive, preserving your wealth to be used in the way you want it to.
Safeguarding Family Wealth
Almost everyone we speak with is looking to ensure that their wealth stays within the family after they die. This could be personal wealth, business wealth or other assets, which they want to see used responsibly for the benefit of their family. In general, there are 2 non-tax ways that you can safeguard wealth for your family, both of which would need to be included in the terms of your will.
Life Interests: Some people prefer not to leave their estate to the surviving spouse outright, and in those cases, you can give them a ‘life interest’ in it instead. This means creating a life interest in the will, which takes the form of a trust. In this trust arrangement, the survivor is entitled to take income from the estate and, for example, to live in a house or enjoy personal effects. But unless the trustees of the trust agree to it, they can’t take the capital or change the people who will ultimately inherit directly after their death.
Delays For Younger Beneficiaries: Understandably, some parents or guardians are anxious about leaving a large inheritance to younger beneficiaries, who may not be old enough to use it wisely. But you can still leave your estate to your children, without worrying about how they will use it, in the form of a trust. Trusts can be set up in your will, and means that the trustees and executors of your will would oversee looking after the inheritance of the younger beneficiaries. The terms of the trust can be different for each beneficiary, and you can generally set any limits you want. For example, you can leave a sum of money and shares to your children, but they will not be able to inherit until they reach a certain age, 18 or 21. That doesn’t mean that they can’t benefit at all until that age – your trustees can use some of that money to pay for their housing, education etc. But the trustees would be in control of that money, so the younger beneficiary would not be able to access it directly.
At Edmunds and Eve, we work with married couples across the South to plan their estates in the most effective way possible. We can help you understand the process your estate will go through, plan for the future of your family and help you act now to mitigate the inheritance tax bill. For more information, or to book your free consultation, just get in touch today.