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Inheritance tax: How to save thousands by planning in advance

28th February 2014

The number of Brits affected by inheritance tax is set to double to 42,000 by the year 2016-17 according to experts, but it seems worryingly few of us know much about the tax at all.

We’re here to put that right. Crowd pleasers to a fault, we’ve put together this guide to help you understand why inheritance tax is important – if a bit morbid. Right, let’s get cracking:-

When you die, the Government assesses how much your estate is worth. This includes the cash you have in the bank or in investments and any property or business you own (with your debts deducted).

Then they send the vultures in to pick on your carcass. OK, I may have made that last bit up.

If the value exceeds the inheritance tax threshold set by the Government, your estate will pay out tax on the remainder when you die.

Inheritance tax can be a huge burden on a family – that we all know – but did you know that by combining a few keys facts and a bit of planning it is possible to legally protect significant portions of your wealth from the taxman?

With the increase in property prices pushing more and more families into the taxman’s crosshairs you could save yourself a lot of money if you know the issues. So where should we begin?

Four key facts everyone should know about inheritance tax

  1. The inheritance tax threshold is set at £325,000 for this tax year so it is only owed if the value of the deceased’s estate exceeds this sum.

  2. The inheritance tax rate is 40% so you’ll get charged 40% on everything above £325,000.

  3. Married couples and civil partners can pass their possessions and assets to each other and the surviving partner is entitled to use both tax-free allowances.

  4. An estate can include property, land, savings, businesses, pensions, investments, life insurance policies, cars, jewellery, antiques and foreign assets.

So let’s say you leave behind an estate worth £500,000. The tax bill will be 40% of the difference between £500,000 and £325,000 – otherwise known as £70,000. A tidy sum I’m sure you’ll agree.

In other words it is definitely worth thinking about what you will leave behind as there are ways to minimise the tax bill and forward planning is crucial.

Two quick tips to help you minimise your inheritance tax bill

There are two main possibilities to consider if you are looking to minimise the impact of inheritance tax on your loved ones.

The first is a transfer of assets.

Sometimes, even if your estate is over the threshold you can pass on some of your wealth without paying inheritance tax.

For example, “gifts” given to your spouse or partner – as well as donations to qualifying charities or institutions like universities – are exempt from inheritance tax.

You are entitled to give tax-free gifts of up to £3,000 in value each year.

The second is the seven-year exemption.

Any gifts you make will be exempt from inheritance tax if you live for seven years afterwards so it is certainly worth planning ahead (and getting your five a day!).

It should also be said that a gift must be genuine and not something that you stand to gain from – for example you couldn’t transfer your house to your children but continue to live in it rent free.

In circumstances like this where gifts are given conditionally the exemption could fail. So be careful.

Do bear in mind – any gifts you have given away less than seven years before your death will count as part of your estate and will therefore eat into your £325,000 inheritance tax threshold.

Summing up: What have we learned about inheritance tax?

Your children’s inheritance doesn’t have to be plundered by the taxman. You can be as savvy about your legacy as you are with your savings accounts – it just takes a bit of forward planning.

Hopefully this guide is helpful in explaining how inheritance tax works and has given you some food for thought.

That said, we do understand that planning for a time when you’re no longer around is never a nice thought and it can be a difficult matter to broach with family members.

So do get in touch if you’d like to discuss your circumstances – we’re always happy to help.