Inheritance Tax. Doing nothing is not an option.
You’ve heard the old adage…”there are only two things certain in life - death and taxes” But whereas death has a certain finality about it, sadly the same cannot be said of taxes. Because even after your death, Inheritance Tax liabilities can still haunt those you leave behind.
Unless you make plans to address the problem of Inheritance Tax early enough, those you intend to benefit from your estate after your death, may at best be inconvenienced, at worst burdened with a sizeable tax bill.
Here, we set out to explain some of the problems associated with Inheritance Tax and some of the solutions for lessening the burden – both emotional and financial - on loved ones.
There is no attempt to tackle all the detail, principally because the nuances of Inheritance Tax are far too complex. What we do hope is that, on reading further, you will understand that ‘doing nothing is not an option’, and that contacting an expert in the field may be one of the best decisions you ever made.
What is Inheritance Tax?
Exactly what it sounds like. It’s a tax levied on the total value of your estate when you die and a beneficiary stands to inherit your estate. Currently, the first £285,000 is tax exempt. Everything over £285,000 is taxed at 40%. This pleases the Chancellor of the Exchequer very much!
What if I die before my spouse?
If you bequeath your estate to your spouse, they won’t pay Inheritance Tax provided you are legally married. However, Inheritance Tax will be levied against your spouse’s estate when they die. So you are deferring the charge, not avoiding it.
Can I avoid paying Inheritance Tax?
In certain cases, yes. But it’s wise to assume that you can’t. There are certain exemptions and reliefs to help you minimise the burden of Inheritance Tax and we’ll help explain some of these options. Forward planning is the key!
I thought Inheritance Tax was only something the wealthy had to pay!
This is a common mistake and a reason why so many people get caught in the Inheritance Tax trap. Think about it. How many of us now own properties of a value almost unimaginable 10 years ago? How many of us now own stocks and shares or have savings?
How much am I worth?
In Inheritance Tax terms, you are worth the total of everything you own, from your house to your jewellery, from your bank accounts to your stereo, from your savings to your car!
In fact, you are certain to be worth more than you think and this is where the problem lies. You’ll be amazed at the assets you have to take into account.
Did you know that contrary to popular belief, PEPs and ISAs are not exempt? Payments from life insurance policies and pensions may also be liable. And even gifts in the form of money and property will be taken into account!
How is Inheritance Tax paid?
This is tricky and sometimes seems grossly unfair. After your death – assuming you are single or the surviving spouse – Inheritance Tax must be paid out of your estate, usually before your assets can be distributed to your beneficiaries. If there isn’t enough money available to pay this bill, assets (a property for example) may have to be sold to meet the demand.
Is it possible to mitigate the effects of Inheritance Tax?
It’s always a good idea to make a Will at the best of times, but absolutely essential if you are liable to Inheritance Tax and wish to minimise the burden or even avoid Inheritance Tax fully!
Exemptions and Reliefs
Some of the most valuable exemptions and reliefs from Inheritance Tax come by simply giving assets away. However, care must be taken. It is not permissible for example to gift a non cash asset like a valuable car to a relative and then continue to drive it yourself.
However individuals can gift up to a total of £3,000 per year to any number of people they wish, and they can make regular payments of up to £250 providing these payments do not materially affect your standard of living.
