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IT’S THE MOST WONDERFUL TIME OF THE YEAR…WHEN THE FESTIVITIES ARE OVER HOW ABOUT A FAMILY GET-TOGETHER TO TALK ABOUT THE FAMILY FINANCES!
15th December 2023
10 minute read

Getting everyone in your circle of loved ones on board and informed is the key to successful Inheritance Tax planning.

Pensions, gifts and Trusts can all be utilised to reduce the amount you have to pay in IHT.

Once you’ve talked through a plan with your family it’s essential you seek professional advice to confirm you’ve made the most of all the allowances, and that you then make a Will.

IIt’s the one time of the year we’re almost certain to see our extended families – often all together in one place. And once the turkey and all the trimmings have been enjoyed, the presents have been put away and the main festivities are done, it can be a convenient time to tackle a delicate subject – the family inheritance. An honest and open discussion can avoid endless tricky situations around inheritance. It can put all minds at rest and pave the way for working with a financial advisor to achieve goals. Poor preparation can make a life-changing difference between helping someone pay off their mortgage or send their children to university – or handing over a lump sum of your hard earned cash to the Government.
If it’s a large family it’s going to be a complicated set of plans and potentially a fraught discussion. But even so, far better to take a breath, open the conversation, and move things forward. Here’s some background to help you kick off a hopefully calm and productive chat. Or maybe even use the info to create a fun Christmas quiz! Interestingly it is estimated that the UK government will collect in excess of £7bn in 2022/23 through inheritance tax and the amount is set to continue to grow. (Source – Statista)

UK INHERITANCE TAX THRESHOLDS

The current standard threshold, known as the Nil Rate Band, is £325,000. This means that the first £325,000 of an individual’s estate is not subject to Inheritance Tax. The Residence Nil Rate Band is an additional threshold that applies to the value of a residence left to direct descendants (children, grandchildren, or other qualifying individuals) as long as your estate is less than £2m. It’s currently £175,000 per person. For an individual who qualifies for both the Nil Rate Band and the Residence Nil Rate Band, the combined threshold therefore could be up to £500,000 (£325,000 + £175,000). Married couples and civil partners can also potentially combine their thresholds, effectively allowing for a combined threshold of up to £1 million (£500,000 each) if certain conditions were met.

If you give away 10% or more of the net value of your estate to charity, you may only have to pay a reduced Inheritance Tax rate of 36% on certain assets. It is important to note that the rate of tax on estates in excess of allowances is 40% – no small number!

HOW AND WHEN IS IHT PAID

Inheritance tax is usually due within six months of the end of the month in which the person passed away. For example, if someone dies in May, the inheritance tax would be due by the end of November. The person responsible for paying inheritance tax is typically the executor of the deceased person’s Will or the administrator of the estate if there is no Will. Inheritance tax is usually paid from the funds in the deceased person’s estate. This may involve selling assets if there is not enough cash available.

In some cases, the executor may be able to pay the tax in instalments, especially if the estate includes property. If the tax is not paid on time, interest may be charged on the outstanding amount. Late payment may also result in penalties. Tax may also be applicable to gifts that were made by the deceased within the previous seven yearsbefore they died, as well as certain Trusts. The rules for these situations can be complex and you should always seek financial advice.

RINGFENCING MORE OF YOUR MONEY FROM INHERITANCE TAX

Trusts
Trusts can be used to manage and distribute assets in a tax-efficient manner. There are various types of Trusts, each with its own tax implications, and various ways of setting them up. For example, Discretionary Trusts, Interest in Possession Trusts, and Bare trusts. Assets placed in certain Trusts may be subject to an immediate charge to Inheritance Tax, and there may be periodic and exit charges. Trusts are complex and you’ll need expert financial and legal advice before setting one up.

 

Gifting
Making gifts during your lifetime can be a strategy to reduce the value of the estate subject to Inheritance Tax. Gifts made more than seven years before death are generally exempt. Small Gifts Exemption allows individuals to make gifts up to the current level of £3000 (or £250 per person) without incurring Inheritance Tax. You can carry the allowance over by one tax year, meaning this rises to £6000 if you haven’t given anything the previous year. And gifts to spouses, civil partners, and charities are usually exempt. If a family wedding is coming up, you can give a child £5000 or a grandchild £2500 and have that taken off your Inheritance Tax liability.

Pensions
Pensions are generally not considered part of the estate for Inheritance Tax purposes. If an individual dies before the age of 75, unspent funds in a defined contribution pension can typically be passed on tax-free. If the individual dies after the age of 75, beneficiaries may pay income tax on the pension at their marginal rate. If you have a number of pensions, you can pass them on to different people.

THE FIRST STEP TO ENSURING YOU MAKE THE MOST OF INHERITANCE TAX PLANNING IS A CONVERSATION

Whatever the plan you agree on, these are potentially complex arrangements and should only be committed to paper after financial advice.

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