How will my money be taxed when I die?

Category: Estate Planning

Although often in the news, Inheritance Tax (IHT) is easy to misunderstand.

If you thought IHT was for wealthy people to worry about, think again. Rising property prices have meant more estates than ever are likely to face an IHT bill. The amount of IHT collected has doubled over the last decade.

If your estate has an IHT liability, your beneficiaries will have to pay the bill. This may not be the kind of legacy most people think of leaving behind. The average bill for an estate paying IHT is over £170,000 according to research by Prudential.

The basics

There should be no IHT liability if:

  • The value of your estate is below the Nill Rate Band (NRB) of £325,000, or
  • You leave everything above the threshold to your spouse or civil partner, or
  • You leave everything above the threshold to an exempt beneficiary such as a charity

The part of your estate liable for tax at the rate of 40%.

So, if your estate is worth £525,000 and your NRB is £325,000, the tax charged would be on £200,000 (£525,000 – £325,000). The tax would be £80,000 (40% of £200,000).

The NRB is £325,000 until 2021. Couples can transfer any unused NRB when the first person died to the survivor. This can double the amount of NRB available up to £650.000.

The Government has introduced an extra NRB, the Residence Nil Rate Band (RNRB). To be eligible you must pass your home or a share of it to your children or grandchildren. This includes stepchildren, adopted children, foster children but not nieces, nephews, or siblings.

If you meet certain conditions this could reduce the IHT liability on your home. You may also be able to use any unused RNRB from your spouse or civil partner’s estate if you are widowed. This can double the amount of RNRB available.

From April 2020 the joint thresholds will be £500,000 for a single person and £1,000,000 for a married couple.

To value an estate, you will need to:

  • List out all the assets and work out their value at the date of death
  • Deduct any debts and liabilities

Assets include cash, property, jewellery, cars, investments, and payouts from insurance policies.

How can I reduce my eventual IHT Liability?

There a variety of methods you can utilise including:

Making gifts

Some gifts are free from IHT:

  • Gifts between spouses or civil partners.
  • Gifts to anyone else up to £3,000 are exempt each tax year and you can carry forward the previous year’s allowance.
  • Small gifts (up to £250) to as many different people as you like.
  • Regular gifts meeting the definition of being from ‘surplus income.’
  • Wedding gifts within certain limits.
  • Gifts to Charities (Gifting 10% of your estate to charity reduces the rate of IHT to 36%)

You would need to include any gifts over the last seven years which do not meet any of the above exemptions in your estate.

Maximising the amount going across in pensions

The death benefits available and how HMRC tax them depend on the type of pension you have and when you die. Pension Death Benefits should not form part of someone’s estate.

Setting up a trust

You can use trusts to ensure assets pass to beneficiaries in a prompt and controlled manner. They can also reduce potential IHT liabilities. There are several types of trusts to meet different needs. Trusts offer much greater control about where your money will go, but they can be complicated to set up. Generally, the more effective the Trust is for IHT, the less access there is to the gifted assets.

Taking out life insurance

Life insurance policies, whether over a set term or taken out for the life, can pay a future IHT liability. Insurance can be expensive, more so as you get older. It usually also involves taking a health assessment, which can be off-putting. Life insurance policies will form part of your estate when you die unless you hold them in trust.

Investments in BPR-qualifying companies

Business Property Relief (BPR) allows certain assets to be free from IHT after two years. These investments are high risk as only companies of a speculative nature can qualify for BPR. The main types are Enterprise Investment Schemes, AIM portfolios, and IHT portfolios. EISs offer income tax relief at 30% in addition to BPR.

There are plenty of things you can do in your lifetime to take care of a potential IHT problem. Finding the right options will depend on your circumstances. We can tailor a plan that reflects your priorities and circumstances. Please feel free to book in a free no-obligation chat here or get in touch.

This guide is for your general information and use only and is not intended to address your particular requirements. It should not be relied upon in its entirety and shall not be deemed to be, or constitute, advice. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of any articles. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.

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