Inheritance tax is often something you only deal with after a household death. However, understanding the fundamentals can be financially smart, particularly with anticipated modifications in the upcoming Autumn Budget.
Reme Holland, financial planning companion at accountancy firm Albert Goodman, has now delved into the subject to help Brits make higher choices. He said: “Inheritance tax is one of those areas that is always under the spotlight, and it seems to be a popular point of discussion at the moment.
“We’ll see what occurs in October, November time, but I would always say, don’t make any rash choices. Seek advice first before you do anything.”
How does inheritance tax currently work?
“Every particular person has a nil fee band of £325,000, which means you can have property value up to £325,000 and not be liable for any inheritance tax (IHT),” Holland explained. Inheritance tax applies only to assets exceeding this amount, with a standard rate of 40% over the threshold.
Are there any exemptions?
Yes, particularly if you’re married or in a civil partnership. “A spousal exemption means that a husband and spouse [for instance] could depart everything to each other, and no inheritance tax would be due,” Holland continued. “It would only be due on the second death, at which level both those allowances [of £325,000] could be mixed.”
Other exemptions include ‘business property relief and agricultural property relief if you’re in farms and estates’ and for those leaving their estate to a charity or a community amateur sports club.
However, Holland also added: “There is another exemption called the most important residence nil fee band, which is a further £175,000 each for married {couples}. One of the situations for having that further allowance is the property has to be left to direct linear descendants, so youngsters and grandchildren.”
What about gifts?
Gifting is where things get more complicated. Claire Exley, head of financial advice and guidance at Nutmeg, also said: “In most circumstances, there is no inheritance tax due on the worth of items given seven or more years before you die.
“However, if you die within seven years of gifting money or another asset from your estate, then your loved ones may have to pay inheritance on the value of those gifts. How much will depend on when you gifted the asset and its value.”
This is the inheritance tax reduction taper. “If you die within three years of gifting money or assets, the IHT rate will be 40%, this rate decreases each year, eventually reaching 0% if you survive for seven years,” Exley continued.
There are guidelines about how much you can reward too – around £3,000 in a single tax yr, with as many smaller items, up to £250 per particular person, also allowed. Birthday and Christmas presents are exempt.
Also, you can’t request items back. Holland added: “If you are making a gift, you need to give it absolutely and not retain any benefit.”
What two potential modifications are being proposed?
“One of the things the government has mooted over the summer is putting a cap on how much can be gifted, and that cap could be somewhere between £100,000 and £200,000,” Holland said.
The second change the Government has talked about is eradicating the taper. “So if you died at any point during those seven years, the full 40% IHT would be chargeable on the value of that gift,” he added.
What could this imply for bizarre people?
Reassuringly, Holland said: “In the grand scheme of things, these two changes to the value of lifetime gifts would affect those on the high end of wealth. The everyday person wouldn’t be impacted by a lifetime cap on gifts.
“However, if you couple these with some of the modifications that are presumably coming into impact over the next two years, such as the remedy of pensions, and also, if you’re a business proprietor, it then might begin to have an influence on more people.”
What can you do to prepare?
Holland recommends looking at your finances and speaking to an independent advisor so you’re informed about your options and can decide ‘whether there’s any scope to use surplus assets to make gifts’ earlier.
“If there is going to be an inheritance tax, and you need to retain a household home, you could look at an insurance coverage coverage to pay the value,” he said. “You might need to ask your youngsters, if they’re beneficiaries, to pay the value of the insurance coverage rather than yourself.”
Meanwhile, Exely said you can consider making regular payments to loved ones too. “There is no restrict to the worth of common funds you can make to another particular person, for instance if you’re serving to with their dwelling prices,” she noted.
“These are identified as ‘regular expenditure out of income’, but it could embody issues like paying rent or a mortgage for your little one, contributing to a financial savings account or Junior ISA for a little one under 18 or offering financial support to an older relative, perhaps to help with care prices.”
Don’t forget to live your life
In spite of this advice, Holland summarised: “The most important factor is wanting after yourself, making sure you’ve got enough money and property to do all of those issues you wished to do. I admire wanting to help household, but don’t compromise on your own retirement because you’re making an attempt to beat a tax – life’s for dwelling. Enjoy your money. You’ve labored actually laborious for it.”
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