Will your family pay too much Inheritance Tax?

“What you enjoy is yours; what you save for your heirs, is already not yours, but theirs.”

So goes the famous saying, but it is becoming increasingly clear that a lack of knowledge and forethought is leading to loved ones losing more than is necessary to Inheritance Tax (IHT).

The Office for Budget Responsibility (OBR) has updated their projections to add a further £900 million in IHT receipts for the period between 2016 and 2022. On top of the original projections, the government has, or expects to, receive an extra:

  • 2015/16: £100 million
  • 2016/17: £300 million
  • 2017/18: £200 million
  • 2018/19: £200 million
  • 2019/20: £100 million

Why are we paying more?

IHT received by the government is steadily increasing each year due to a growing population. As the number of people reaching retirement and pension age each year increases, so does the number of people dying. With more estates to tax, it is only logical that more tax will be taken overall.

However, not all IHT payments are necessary, and there are many ways to make a tax-efficient plan which will reduce the IHT liability on the assets you leave behind.

The reasons for the increase in unnecessary IHT payments centre around two key issues:

1. Understanding how IHT works and is applied

Almost half (48%) of over-50s say that they have ‘not very good’ or ‘terrible’ understanding of IHT, according to WAY Investments. Additionally:

  • 48% were unaware that IHT is charged at 40%
  • 25% were unsure as to whether their estate was IHT liable
  • 22% mistakenly thought that their ISA accounts would be exempt from IHT

2. A lack of estate planning and preparation

Preparing your estate whilst alive allows you to make a plan which will reduce and possibly, completely remove, the IHT liability on the inheritance you leave behind for loved ones.

Next steps

Like all financial plans, estate planning should start early. The sooner it is in place, the longer you have to make tax-efficient choices and take advantage of the options available during life to reduce the IHT payable when you die. To create an effective plan, you should:

Understand: Knowing the value of your estate means that you can plan how you will use it in a tax-efficient way, using the options available to you. This includes knowing how much you need to spend to live the lifestyle you want and how much you wish to leave behind for loved ones or charities.

Make a will: Making and regularly updating your will is the most effective way to ensure that your wishes are followed when your estate is distributed. It is also useful for reducing IHT. If you do not have a will, your estate will be distributed according to intestacy laws. In this case, it is unlikely that the decisions made on your behalf will be in line with your intentions, and may incur more IHT liability than necessary.

Gift: Giving money away while alive is a valid way to reduce the estate left behind when you die, and reduce the IHT due simultaneously. There are many ways to do this:

  • You have an annual gift exemption of £3,000. You can give away financial gifts, free of IHT, until you reach this limit
  • Monetary gifts given to children and grandchildren which breach the exemption, will incur IHT liability, if you die within seven years of giving it to them
  • You can give a wedding gift of up to £5,000 to children, £2,500 to grandchildren and £1,000 to friends and other relatives, IHT-free
  • You can give unlimited gifts to charity whilst living, without incurring IHT liability.

Take advice: Professional financial advice gives you an ongoing relationship with a qualified financial adviser, who gets to know you, your wishes and your goals. The adviser can offer tax-efficient methods to enable you to make sure that your loved ones benefit as much as possible from your estate.

To discuss your estate planning, giving financial gifts or questions about IHT, don’t hesitate to contact us on 0800 612 8099.