A Short Guide to Inheritance Tax Planning
Inheritance Tax (IHT) receipts for the 2022 to 2023 financial year were a staggering £7.1billion. That is a 16% increase from the previous year. Rising house prices will in all likelihood ensure that the tax payable to HMRC will continue on an upward trajectory.
Inheritance Tax (IHT) is probably the most resented of all taxes, however with proactive planning it is one of the easiest to legally avoid. Careful planning can stop a substantial portion of your wealth going to the HMRC after you die. Do you have a plan in place yet?
The tax-free threshold for Inheritance Tax is currently £325,000.00 per individual. There is also scope to utilise the Residence nil rate band allowance of up to £175,000.00, subject to specific conditions being met. What this means is that unless you take the correct steps to prepare, anything over and above that value within your Estate would be taxed at 40%.
What is included in your Estate? For IHT purposes, your estate includes –
- All money – including stocks/shares.
- All property – land and any buildings owned
- All possessions – including furniture, jewellery, and antiques
Inheritance Tax applies unless your beneficiary is a spouse, civil partner, charity, or community club. When you are passing on your Estate to children or other family members, the Estate is potentially subject to IHT.
There are ways to manage and reduce the implications of Inheritance Tax – but you need to be proactive.
5 simple steps to reduce Inheritance Tax
Do you have an up to date Will? If you do not have a Will then get one organised.If you do have a Will then check your Will is reflecting your current wishes. Having a Will in place protects your assets by ensuring your wishes are carried out, also potentially reducing IHT if drafted correctly.
Are your life insurance policies written in Trust? By writing your life assurance plans in Trust the proceeds payable on the Policy on death will pass into a Trust that will then distribute the proceeds to the named beneficiaries.By doing this your life insurance proceeds will not be counted as part of your Estate for the calculation of IHT when you die. Plus, your chosen beneficiaries will not have to go through probate, so they will receive the proceeds more quickly.
Are your pension funds nominated correctly? To avoid your pension savings being accumulated within your Estate on death, you need to nominate beneficiaries. Without this being done correctly, your pension fund will potentially be subject to IHT.
Are you making the most of your annual exemption allowance? You can gift a total of £3,000.00 worth of capital to beneficiaries each tax year.If you have not utilised the allowance in the previous year, you can carry this forward for one year only. These gifts will not be added to the value of your Estate, therefore can help reduce any potential IHT bill.
Have you considered gifting assets in excess of the annual allowance? If you can afford to, it can be beneficial to consider making gifts to your chosen beneficiaries of larger sums of capital.These gifts can be made outright or can be made in Trust, if you want to retain a degree of control over ongoing income from the gifted capital. The Potentially Exempt Transfer (PET) legislation allows you to make gifts of unlimited value that will not be counted when your Estate is valued on death, providing you survive for 7 years.
As with all financial planning, it’s best to get ahead of the situation early. Education around effective Inheritance Tax planning benefits everyone. You can sidestep your wealth being added to the HMRC receipt pot while supporting the next generation.
Do you need help assessing your finances to take positive steps? Campbell Mackie Limited are always on hand to provide a full review of your financial situation.
Book your free initial consultation: call us on 0141 632 2406 now