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Inheritance tax (IHT) is the tax that British people love to hate. Not that this is unjustified. After all, you spend your whole working life paying taxes on your assets and earnings. Many people want to leave a meaningful legacy to their loved ones, mitigating any unnecessary IHT liability. However, how can this be done legitimately?
The good news is that there are many strategies open to people in 2021-22. In this article, our team at Hanson Financial Services (financial advice in Liverpool) offers some ideas to consider for your own estate. We hope you find this content useful and invite you to get in touch if you’d like to discuss your own IHT strategy with us.
IHT: an overview
In 2021-22 each person gets a £325,000 IHT-free limit. This means that the total value of your “estate” (i.e. all of your assets, minus exclusions) under this amount is not taxed when you die. These include things such as the following:
- Cash savings.
- Property – including your home.
- Furniture and valuable possessions (e.g. jewelry).
Adding this up in your own case, you might already be under the £325,000 limit and, therefore, feel like you do not need to worry about IHT. However, this may not always be the case – i.e. if your wealth grows in the future. For those with an estate exceeding this limit, other strategies will need to be considered.
The Main Residence Nil Rate Band
Many people will notice that the value of their home already exceeds the £325,000 limit – such as those living in the South East. Here, you can mitigate IHT using the Main Residence Nil Rate Band (MNRB). This allows each person to “extend” their IHT-free threshold by £175,000 if they pass their main home down to direct descendants (e.g. children or grandchildren).
Combining spouse benefits
For married couples and civil partners, there is an additional IHT advantage available. When you or your spouse dies, any unused IHT allowance is passed automatically to the other person – free from tax. Assuming the deceased person has not used any of it, this effectively “doubles” a couple’s IHT threshold to £650,000.
The same also holds true for the MNRB – which could extend the combined IHT-free threshold to a total of £1m. Bear in mind, however, that this does not work for unmarried couples; even if you cohabit and have had children together.
Making use of gifts
Each tax year, an individual is entitled to an “annual exemption”. This allows you to give away up to £3,000 without these getting added to the value of your estate. If you plan to eventually give your money, property and other assets to others after you die anyway, then this could be a tax-efficient way to bestow them, earlier on.
The £3,000 can be given to one person or split between many. You are also allowed to give as many £250 individual gifts as you like, to different people. Finally, there are tax exemptions for gifts made to a child’s wedding (up to £5,000), to a grandchild’s wedding (£2,500) and £1,000 to another person’s wedding.
The 7-year rule
It’s fairly well-known that, if you make a gift and survive it by 7 years, then it is exempt from IHT. This is true – unless the gift is within a trust structure If you die within the 7 years, then a “taper” system applies which reduces the amount of IHT to pay on the gift (after year 3; if you die prior to this, then 40% still applies). For instance, if you die between years 5-6, then 16% will need to be paid on the value of the gift. Bear these rules in mind before rushing to make a large gift.
There is a common misconception that putting your assets into a trust avoids IHT. This is not strictly the case. Here, the type of trust is very important. For instance, transfers into a “bare trust” may be exempt from IHT provided the settlor survives 7 years afterwards. Transfers into an “interest in possession” trust, however, will not have to pay IHT if assets were put in before the 22nd March 2006. If it was set up after this, however, then a 10-yearly Inheritance Tax charge may be due.
Conclusion & invitation
All of the above strategies can be crucial in an individual’s efforts to leave a more meaningful legacy to their loved ones. However, above all it is crucial to consider crafting a legally-sound will and keep it up to date. This will help ensure that your assets are distributed according to your wishes after you die, and do not get encumbered by the UK’s intestacy rules.
Are you interested in talking to a financial adviser about your pension and estate plan? We’d love to assist you here at Hanson Financial Services.
Please contact us to arrange a consultation with our team – free and without obligation – to gain more clarity and peace of mind over your financial plan.
You can call us on:
Liverpool Office: 0151 708 7616
Manchester Office: 0161 401 0991
Chester Office: 01244 960 039Or email via: [email protected]