At Sovereign Wealth Market Harborough, we specialise in Inheritance Tax and Estate Planning.
No longer is Inheritance Tax (IHT) just a sole concern of the wealthy. Despite many people being aware of the need to do IHT planning, few do anything to address their concerns and potential liability. In fact, HM Revenue & Customs collected £5.2bn in IHT revenues in 2017/18 alone**.
Unfortunately, without the correct advice and careful financial planning, HM Revenue & Customs could be the biggest single beneficiary of your estate when you die.
What is IHT?
IHT is effectively a tax on your wealth and is payable to Her Majesty’s Revenue & Customs (HMRC) on money or possessions you leave behind when you die. This can also apply to some gifts you make during your lifetime. Protecting yourself from inheritance tax will allow you to pass on your wealth to future generations
IHT has now become more relevant than ever. The tax liability on even a relatively modest estate can have a dramatic effect, and on a large estate it can be even more damaging.
It is worth noting that Inheritance Tax does not apply to everyone. An estate is only liable once the value is above the current nil-rate band (NRB) which at present is set at £325,000 per individual. So, in this instance where an estate is less than the current NRB, no IHT is liable. For married couples and registered civil partnerships, the threshold for IHT is currently £650,000 (both individual allowances combined) where the full allowance of the deceased partner has been passed to the surviving spouse. Anything in excess of this allowance is taxed at 40%.
IHT mitigation is increasingly becoming a more significant part of good financial planning, as more and more estates fall outside of the nil-rate band and become vulnerable to tax. As average property prices continue to increase, more estate will now be valued over the IHT threshold.
The Residence Nil-Rate Band adds an additional tax-free allowance to the existing £325,000 NRB. For the tax year 2020/21 this sits at £175,000. Following this, it will increase in line with the Consumer Prices Index (CPI). It has also been confirmed that the current NRB of £325,000 will remain frozen until the 2021/22 tax year.
What options are available to help mitigate IHT?
- Your Will* - ensure it is planned and written correctly to save the maximum amount of tax.
- Annual exemptions, Gifts from Excess Income, and Lifetime Gifts - transfer assets through the prudent use of these allowances.
- Pensions – although broadly exempt from IHT, if passed to your survivor they will form part of their estate. St. James’s Place can offer solutions which allow your survivor to access your death benefits without them forming part of their estate.
- Trusts* – legal agreements where property (money or assets) are managed by trustees for the benefit of a defined list of individuals.
- Business Relief (BR) – applies to qualifying business property providing 100% IHT relief. St. James’s Place offer services which may reduce IHT liability whilst also retaining an element of control and flexibility over the capital.
- Whole of Life Insurance/Assurance – a life insurance policy which pays out a capital sum on the death of the policy holder. This can then be used by beneficiaries to settle an IHT liability. It is essential that the policy is written into trust. This will ensure the amount the policy pays out is paid directly to the beneficiaries of the trust rather than into the estate, further compounding the IHT liability.
Worried about IHT? Contact Sovereign Wealth in Market Harborough today on 01858 791182 for a no obligation initial consultation and get an inheritance plan tailor made for you.
You can also refer to the St. James’s Place Inheritance Tax Calculator for further guidance.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
*Will writing involves the referral to a service that is separate and distinct to those offered by St. James Place and along with Trusts are not regulated by the Financial Conduct Authority.
Sources: **gov.uk KMRC tax receipts 24 April 2018 and Gov.uk, 28 July 2017