Estate planning & inheritance tax
How to minimise inheritance tax bills
Inheritance tax, or IHT, is often regarded as unfair but it’s an integral part of estate planning.
It will form a key part of your overall financial plan, which we will work closely with you to create, as it will ensure that the biggest beneficiaries of your estate will be your loved ones. While it’s worth considering passing on assets while you’re still alive, our expert team here at Purity Financial can help you minimise the impact of inheritance tax on your estate. There is no single way of minimising your IHT liability, but can include a dedicated insurance policy and comprehensive, clearly structured will. In some cases, addressing your estate planning can also have an added benefit of helping to reduce your overall income tax bill too.
Not all estates will be liable for inheritance tax, and how much you’ll potentially lose in IHT will vary case by case, but it’s important to factor it into your plans.
There are several ways in which you can mitigate IHT liability ranging from widely accepted schemes to more dubious strategies. We can help guide you through this often complex area to identify the most appropriate option for your estate.
How much is inheritance tax and when is it paid?
Standard inheritance stands at 40%, if paid on death, and is applied to the value of all worldwide assets, less any reliefs and exemptions, that exceed the nil rate band (which is also known as ‘de minimis’ allowance). It is most commonly paid on the transfer of an individual’s estate on death, and it must be paid within six months of the deceased’s passing. It’s also worth noting that some lifetime wealth transfers may also be applicable for IHT.
What is the difference between Nil Rate Band and Residence Nil Rate Band?
The Nil Rate Band
Also known as the IHT threshold, the nil rate band, or NRB, currently stands at £325,000 for individuals and double for both married couples and civil partnerships, therefore a £650,000 threshold. This is chargeable on death, and in real terms means a person’s estate will only be liable to pay IHT if it is valued at over £325,000, or £650,000 for couples. So, if it falls below you pay nothing – 0% in IHT.
The Residence Nil Rate Band
This is an additional allowance to NRB, and will apply only in cases where a main residence is being passed down to a direct descendant. The current rate for this stands at £175,000 per person. Currently, the combined allowance for married couples and civil partnerships, for both NRB and RNRB, is £1,000,000.
How to combat inheritance tax
There are strategies that can be implemented to combat inheritance tax and our experts at Purity Financial can navigate you through the applicable options.
If your estate does exceed threshold limits, it’s best to act now and utilise options currently available on the market to cut your IHT liability. The danger with waiting instead is that beneficial products could disappear with changes in political and economic arenas. By adopting a long-term approach to inheritance tax planning, you can ensure you maximise the benefits of current relief and exemptions. If you take action to reduce your inheritance tax liability now, then there are several simple measures you can use to make a significant impact.
The following are some of the ways in which you can reduce your IHT:
- Make full use of the current IHT exemptions and reliefs while they’re still available;
- Share your assets while you’re still alive;
- Make a comprehensive will;
- Make lifetime gifts;
- Maximise the nil rate band and new residence nil rate band;
- Pension funding – by utilising new flexible pension rules;
- Ensure your beneficiaries have enough money to pay any IHT liability on your death.
When a person dies without leaving a valid will their property, or estate, will be shared out according to a set of rules called the rules of intestacy.
The deceased person in these cases is referred to as an intestate person. There are different intestacy rules in the UK, depending on whether you live in England and Wales, or in Scotland, so it’s important to understand which rules apply to you.
It’s also essential to note that the rights of step-children differ between intestacy rules and the RNRB. Our independent financial advisors will ensure your will is properly structured to protect your interests.
IHT and pension schemes
Pensions are a great tax-efficient way of saving for the future, but it’s not something which you should put in place and then never review again. In fact, regular reviews of your pension arrangements are important to ensure you’re able to continue maximising your pension’s potential tax efficiency as the years go by.
It’s also worth knowing that under most pension arrangements death benefits don’t form part of a deceased person’s estate and are normally exempt from IHT.