Inheritance tax. Why pay this optional tax?

People generally plan for the short term. We tend to concentrate on generating wealth and accumulating assets such as property or shares to protect our families. Both now and in retirement. However, what happens after we die? Arranging funeral expenses may be the only action we take. By doing this we are helping to build a significant fund for HM Revenue and Customs. This tax is known as inheritance tax. It is sometimes referred to as IHT.

How is inheritance tax calculated?

For most couples, the actual inheritance tax (IHT) liability only occurs after the death of the surviving partner. Your estate, which is the total value of your assets including your property and investments less your liabilities. The Estate is then valued on death and anything above the nil rate band is subject to inheritance tax. The nil rate band tends to change with each budget but is currently £325,000 for 2017/18. The current inheritance tax rate is 40%

What should you be thinking about now?

It is possible for you to reduce or completely offset your inheritance tax liability before your death. But how I hear you ask? Well the sooner you start planning the greater the potential saving will be. Also there will be more options open to you.

These option can include-

• Wills
• Using exemptions and tax reliefs
• Making gifts
• Trusts

So let have a look at these tax saving options

Wills.

Will allow you to appoint and apportion your estate to those individuals you want to benefit. If no will exists then you will be deemed to have die intestate. The intestacy rules will dictate to whom your assets are distributed. This may not be your intended beneficiaries. At Anstee & Co we do not write wills but we work with solicitors who do.

Exemption reliefs.

Some gifts are exempt when made during a person’s lifetime. Others can benefit from relief of up to 100 per cent from inheritance tax. Our financial advisers will be able to provide you with the exact and current details.

Making gifts.

If you make a gift without reservation of benefit. This means a “reservation of benefit” is one where the donor retains an interest in the asset being given away, or where the beneficiary does not take fill ownership or possession of the asset. This gift will be outside your estate provided you live for more than seven years beyond the date of the gift. Our financial advisers can recommend estate planning solutions that will help you make gifts in the most effective way. Often by recommending trusts.

What are trusts?

Trust are often used when making gifts. A trust is established when the owner of an asset. Known as the settlor. Wishes to pass ownership to someone. Known as the trustee. The trustee hold the asset for the future benefit of someone else. Known as the beneficiary-

• The trustee is the legal owner of the asset, who looks after it until it can be passed onto the beneficiary,
• Often, a beneficiary cannot benefit from the asset until the trustee says so.
• The trustees’ powers for example to amend the beneficiaries depend on the wording of the trust.
• How can a trust protect your estate?

One solution may include the following steps-

• The settlor puts assets into a trust, the terms of which will be such that the settlor cannot be a beneficiary.
• Because ownership passes from the settlor to the trustee, it is considered to be no longer part of the settlor’s estate.
• Because the settlor cannot be a beneficiary, there is no reservation of benefit. Remember, a “reservation of benefit” is the one where the donor retains an interest in the asset being given away, or where the beneficiary does not take full ownership or possession of the asset.
• Inheritance Tax savings can be made with the seven years rule still applying.

Leave something to charity.

Anything you leave to charity is free from Inheritance Tax. This can be a useful way of reducing your tax liability and helping a good cause you wish to help.. If you leave at least 10 per cent of your estate to charity it will reduce the rate of tax your estate will pay from 40 per cent to 36 per cent. This may not seem a huge amount but it does mean that your family will receive more than they would normally while also helping your favourite charity.

How Anstee & Co can help with inheritance tax planning.

It is important that you review your situation yearly with your independent financial adviser (IFA). Especially after major financial changes such as retirement, the sale of your business or the receipt of an inheritance.

This article is only designed as an initial guide to your inheritance tax liability and the ways to reduce it. There may be other factors to take into account when assessing your actual liability. Our financial advisers will always work with your existing accountants or tax advisers. If your do not have your own professional tax adviser we can introduce you to one.

Why not contact us today to see if we can help?

We have offices in Kettering, Stamford and London. Our financial advisers make use of meeting rooms in Towcester, Wellingborough, Northampton, Rushton, Bedford and Warwick. We will provide financial advice at your home or office if it is based in Northamptonshire, Lincolnshire, Bedfordshire or Warwickshire.

The first meeting is free, so what’s to lose. See if you can save paying an unnecessary tax!