Inheritance tax (IHT) planning is a massively important area for advisers to keep on top of. Here, PA outlines seven key ways to help clients limit their tax bills
Close to 800,000 homes in Britain are now worth at least a million pounds meaning their owners could face potential IHT liability on death. Here, Wealth Club outlines seven key points to share with clients to limit their exposure.
Chief executive Alex Davies said: "Inheritance tax is regularly described as the most unjust and hated of all taxes. After paying tax for a lifetime, it may seem unfair to then be taxed on the wealth you leave behind.
"Traditionally IHT didn't impact many people because the thresholds were set very high, but with rising house prices many more people will now fall victim, and part of their estate could be subject to a hefty 40% tax charge on their death."
- IHT is a 40% tax bill levied on some estates when a person dies. It is normally possible to pass on your estate to a spouse or civil partner completely tax-free on death - but children or other loved ones can't benefit in the same way.
- If the estate is worth more than £325,000, the current threshold or ‘nil rate band', IHT of 40% applies to the excess.
- In April 2017 the new ‘main residence nil-rate band' was introduced in addition. It starts at £100,000 and will increase by £25,000 a year until it reaches £175,000 in 2020.
- So, single homeowners could pass on an extra £100,000 IHT free - £425,000 in total, rising to £500,000 by 2020.
Here, Davies outlines seven IHT points to live by…
Make a will
This is the most basic, but often most neglected, form of estate planning. Without a will, your client's estate will be distributed according to set rules, meaning a larger portion may go to the taxman.
Suggest clients gift assets during their lifetime. People have an annual £3,000 tax-free gift allowance, known as the annual exemption. If they haven't used their annual exemption fully in the previous year, clients can combine it with the current year's allowance. The money is immediately outside their estate so there will be no IHT to pay.
People can also give up to £250 each year to however many people they wish (but only one gift per recipient per year), make a wedding gift, or leave 10% or more of your net estate to a charity, which may enable them to qualify for a reduced IHT rate of 36%.
As long as your client lives for at least seven years after giving money away, there is no limit on how much they can give completely IHT free.
Use the full pension allowance
Pensions, including those in drawdown, are free from IHT and can be passed on tax efficiently. So, if your client has any allowance left, make use of it.
Set up a trust
Trusts have traditionally been a staple of estate planning, and can be very effective at reducing the estate's value and therefore the potential IHT charge. It's important to note that assets placed in trusts will only fall outside of an estate for IHT purposes if they live for at least seven years after establishing the trust. The related taxes and laws are complicated, however, and any decision a client makes may be irreversible.
Invest in companies qualifying for Business Property Relief (BPR)
Anyone that owns or invests in a business that qualifies for BPR for at least two years can benefit from full IHT relief. Your client must still be a shareholder on death though.
Invest in an AIM IHT ISA
ISAs are tax-free during a saver's lifetime but when they die, or when their spouse dies if later, they form part of an estate and could be subject to 40% IHT. An increasingly popular but still vastly underused way of getting around this is by investing in certain AIM-listed companies which qualify for BPR via a stock and shares ISA. Clients must hold the shares for at least two years; after which they could potentially pass on assets to whomever they wish without a penny due in inheritance tax.
The Christmas general election of 2019 will soon be upon us and so, here, Jonathan Simmons explores the parties' inheritance tax plans...
'Select the right BR investments'
Lack of understanding
Popular offers in high demand
The government will reintroduce the pension schemes bill as part of an “ambitious programme of domestic reform”, the Queen’s Speech confirmed today.
Misuse of audio feed
Should advisers be educating clients to take more risk to reach their objectives or should they encourage a more cautious approach? Claire Tyrrell spoke to couple of advisers and a compliance expert about how they broach the topic of risk with their clients......