This is the first guest blog that I will pepper in among my own articles as we go through the various Age Life Balance topics. Today’s article has been written by Evolution For Women financial advisors. I’ve learned a lot from it and hope that you’ll find it both interesting and useful.
Financial – Inheritance Tax Checklist
Death is not a subject many of us like to talk about, but the sad reality is that many grieving relatives are hit by a financial sting in the tail after their loved ones have gone: inheritance tax.
Inheritance tax (IHT), introduced to the UK in the mid-1980s, is a tax levied on property and money worth more than £325,000 left as a gift following your death. Anything above this threshold is taxed at 40%, or 36% if at least 10% of the estate is left to charity. If your heirs then go on to sell any property you’ve left them for more than it was worth at the time of your death, they will also be liable for capital gains tax.
While we all want to leave something to our loved ones, we don’t like the thought of them being hit with legal or financial red tape when settling our estate.
At Evolution For Women, we have put together an inheritance tax (IHT) checklist – 10 steps to protect your family from a potential inheritance tax bill this year.
How do I avoid my family paying inheritance tax?
1. Know your liability
Estate planning is very important when lowering the inheritance tax contribution your loves ones would be expected to pay. Regularly review the total value of your assets, so you understand exactly how much tax is liable, and you can then take steps accordingly to reduce it.
2. Make sure your will is up to date
Before you even think about how to bring down IHT, make sure you have updated your will to reflect exactly who you want your estate to be left to. This will also help you decide who to gift money to in your lifetime, which we’ll talk about momentarily.
Once you’ve carried out estate planning and you know whether it is going to be worth more than the £325,000 threshold, there are steps you can take to mitigate the tax due. For example, married couples and registered civil partners can make use of each other’s tax-free allowance.
You can also make financial gifts to your family while you are still alive.
3. Consider gifting now
Everyone has a personal allowance, which allows them to give away up to £3,000 per financial year tax-free – and if you haven’t reached this threshold, it can be carried over into the next tax year.
Additionally, you can give away up to £250 to anyone tax-free during the financial year, provided they are not the recipient of the £3,000 gift.
4. Work with your spouse
In 2007, the UK government changed regulations so that civil partners and married couples can make use of each other’s tax-free gifting allowance without having to apply for special tax planning.
Therefore, if your other half has not used up their personal allowance for the tax year, you can use it to gift more to your estate beneficiaries.
5. Discuss charitable giving
Leaving money to charity is one way of reducing your IHT bill, at the same time as helping out a worthwhile cause.
Any money you leave to charity is not liable for inheritance tax, and also helps lower the amount of your estate where tax will be payable.
6. Set up a trust
When estate planning, if you put certain assets into a trust, they no longer form part of your estate – and can, therefore, lower your inheritance tax bill.
The trust will need to have a minimum of two trustees, who ensure that the money is paid out to trust recipients (often grandchildren or children) in the event of your death. Many people opt for a discretionary trust, as this still allows easy access to their finances within their lifetime.
7. Take out insurance
If you think you’re going to leave your family a considerable IHT bill, think about taking out an insurance policy to cover it. This will offer them a pay out when you have passed, to help cover the costs.
8. Help with your kids’ future
In addition to the annual tax-free personal allowance, those of you with children can give away assets to your offspring.
For example, the tax on giving your children money with which to buy their own home will be written off even if it exceeds the £3,000 threshold, provided you continue to live for seven years after making the gift.
9. Spend your savings before your pension
The best method of inheritance tax avoidance is to spend your money while you’re still alive; the more you leave, the greater financial burden it will be subject to. If you are retired or approaching retirement, think about spending your savings before you dip into your pension pot.
This is because standard savings accounts are liable to IHT, but unused sums remaining in a pension can be passed on mostly tax-free, although they are sometimes liable to income tax.
Some items are even exempt from IHT, such as wedding gifts and agricultural property. You can see the full list at the Money Advice Service website.
10. Be smart – but don’t get silly
While it’s important to reduce your inheritance tax bill where possible, don’t be tempted to compromise your quality of life now just to help your family out further down the line.
Never put yourself in the position where you are struggling for money now, just to bring down IHT liability
Your inheritance tax check list
Know the up-to-date value of your estate – that will inform what course of action you take
Be aware of the £325,000 threshold – anything you leave above this figure will be subject to tax
Have a valid will – so your hard-earned estate goes to exactly who you want it to go to
Consider gifting – this can help out relatives while you’re living and also reduce IHT in the event of your death
Think about giving to charity – save money on your tax and help a good cause
Put provisions in place – if you think your heirs will struggle to pay the posthumous tax bill for your estate
Never compromise yourself – although you don’t want to be passing down unnecessary tax, you also want to have enough funds to live a fulfilling life
If you’re unsure about how to plan your estate, contact the financial planning team today at Evolution For Women. www.evolutionforwomen.co.uk
Thank you for reading. For more interesting articles, visit my blog at www.agelifebalance.com to learn more.