Leaving your property to a family member may seem like a generous act, but you may want to think about inheritance tax in advance. Sam Funnell from Fine & Country Rugby gives a few basic tips on this tax.
The saying “nothing is certain except for death and taxes” is generally attributed to Benjamin Franklin. When death and taxes combine in the form of Inheritance tax, it seems to add insult to injury. Inheritance tax is a tax on the estate of someone who has died and is often referred to as a “death tax”. While it currently affects a small number of estates – somewhere around 4% in 2014/2015 – the amount of revenue has increased annually. With the rise in house prices, there may be a further increase in the number of people liable for the tax.
Inheritance tax is charged at 40% on assets above the current tax-free threshold, which is £325,000 for an individual and £650,000 for a married couple. Changes introduced in 2017 mean an individual can transfer an additional £125,000 this tax year to their direct descendants – rising to £150,000 in the 2019/20 tax year and £175,000 in 2020/21.
Firstly, it is essential you make a will to ensure the right people benefit. If you die without a will, your estate will be dispersed according to intestacy rules and may attract a higher level of tax.
Inheritance law is complex, but there are a lot of different ways you can legally avoid paying inheritance tax. Reducing the value of your estate is one of the best ways. Gifts of smaller sums, up to £3000, can be made annually to your spouse or legal partner, a registered charity or a political party and are inheritance tax free. There are other allowable gifts, too, including variable amounts for weddings or civil ceremonies, the value of which changes according to your relationship. Importantly, you must not benefit from any money or assets you give away, as if you do, your estate will still have to pay inheritance tax.
Gifting larger amounts is possible, but more complex and you must live for seven years for it to be completely tax free. Before gifting large amounts especially early, it is important to take into account that while you may not need what seems to be excess cash now, you might need it later in life. Concerns about gifting to younger children or grandchildren can be allayed by setting up trust funds to ensure the money is spent wisely.
Like trust funds, there are some investments that qualify for tax relief, but they need to be carefully structured. Any investment carries a level of risk and should be assessed firstly on its merit as far as a sound investment is concerned, rather than a means of tax avoidance.
Taking out life insurance, which can be placed in trust allowing your executors to pay any outstanding tax outside your estate, is an effective and important part of planning.
Before you give everything away though, remember to enjoy the money you’ve worked for and spend it. There’s no need to live on a tight budget just to save money that will be taxed.
For advice on selling or buying property, please contact Fine & Country Rugby on 01788 820062 or visit www.fineandcountry.com