UK inheritance tax (IHT) receipts have more than doubled in the last ten years and are expected to hit a record £5.4 billion in the 2018/19 tax year.
Peoples views on IHT vary. Some will say that they have paid tax on their monies all their lives and don’t see why they should pay it again when they die. Others accept IHT is another tax that is due and the beneficiaries will still receive monies from the net estate.
Whichever side of the argument that you fall though, if you do try and plan ahead, it is possible to pass on more of your wealth to your chosen beneficiaries and to pay less IHT just by maximising your allowances.
What is Inheritance tax?
IHT is a tax that applies to your estate when you die. It can also apply to some lifetime gifts made in the seven years before you die, and to specific types of trusts.
Your estate is defined as the value of the assets you own when you die (such as your home, second properties, cash and investments) less your liabilities (such as mortgages, loans and other borrowings). In most cases your pension will not count towards your estate for IHT purposes.
The second issue that the HMRC will look at is where you are domiciled (rather than resident). Your domicile is normally your place of birth but can change if you make a permanent home in another country. How assets are taxed and which ones are included/excluded depends partly on where you are domiciled.
How much will I pay?
Every asset is subject to inheritance tax although there is an allowance available to everybody that is taxed at 0%. After this allowance is used up then all assets are subject to a 40% rate.
Although the headline rate of IHT is 40% is normally quoted, there are various exemptions, allowances and reliefs that mean that the effective rate of IHT paid on estates is usually lower.
Those leaving some of their estate to registered charities can qualify for a reduced headline rate of 36% on part of the estate
What allowances or exemptions are available?
- All assets transferred to a UK domiciled spouse or civil partner are exempt from IHT
- Assets transferred to registered charities, community sports clubs and housing associations, to qualifying political parties are also exempt.
- Annual allowances for small gifts
- Income based gifts
- Wedding gift allowances.
These are just an example of some of the allowances available and others are available via gifting and using the 7-year rule to avoid tax on your estate.
How can I mitigate or plan for IHT?
- Lifetime gifting
- Pension planning
- Insure against liability
- Estate planning and ensure that an up to date will is in place.
At MWS we can help to guide you through the various options available with your allowances and what is the most appropriate for your personal circumstances.