The inheritance tax (IHT) was brought in in 1986 and is yet another way HMRC can try and put money back into the government’s kitty. At 40%, this can have a huge effect on what you can pass on to your children and grandchildren. Usually if you have a joint estate over £1million, though this can be lower.
However, this is often considered as a ‘voluntary tax’ because there are so many actions that people can take nowadays to prevent this from ever being payable.
Knowing your Allowances
To put it simply, everyone has up to £325,000 they can pass on before IHT, with an additional £175,000 if they have a main residence with a portion of at least that value, to pass on. In addition, you can pass any assets to your spouse, free from inheritance tax and then any unused allowance can also be inherited by your spouse.
This usually results in wills being written to first pass everything to your spouse, so no IHT payable and they inherit £500,000 of IHT allowance, then to the kids, providing £1million total allowance before IHT is payable. There are important factors that affect this, and it is our job to consider when providing financial and planning advice. However, this is a good base level to understand why estates over £1million are at risk of this tax.
Why is your estate over £1million?
If you are reading this then you are likely approaching or are over that threshold. Rising property and share prices are a great thing until you realise that your kids will only get to keep 60% of it.
So, inheritance tax planning is, in the main, about reducing what you own, to make sure it comes under this level, which is easy to do while you are fit and well but almost impossible to do successfully in later life, when you realise it may be too late.
I have seen so many clumsy mistakes in last minute tax planning from unfortunate people, who half read the rules and end up doing nothing but incur themselves in even more tax than they had envisaged.
How to own things that are not yours
You can’t. However, you can exercise some control over assets that you give away and there are smart ways to get money out of your estate, that can still provide you with an income. You won’t own then for inheritance tax purposes.
Want to know more about the countless things you can do….
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We are independent Financial Planners and so saving you unnecessary taxes is part of our job.
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Inheritance tax planning advice is not regulated by the Financial Conduct Authority.
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