Inheritance Tax
Have you noticed that for some time now tax brackets and tax thresholds have barely risen, meanwhile household wealth has? You are likely concerned, then, about how much tax you and your family will pay, especially when it comes to passing on inheritance from one generation of the family to the next. Let’s take a look at this in more detail.
The inheritance tax threshold for which the estate of an individual becomes liable to pay inheritance tax after death – also referred to as the Nil Rate Band – has been frozen at £325,000 for the past 14 years. Since the year 2009, which is how long ago that was, the average house value in the UK has nearly doubled from circa £155,000 (source: Office of National Statistics – UK House Price Index - Office for National Statistics (ons.gov.uk), 16th June 2021) and by way of a reminder, any wealth subject to inheritance tax will be taxed at 40% (this is also referred to as the ‘death tax’). Families are paying increasingly more inheritance tax.
Even with the introduction of the Residence Nil Rate Band – a tax relief available on residential property, which is applicable when the main residence is passed to lineal decendants, the Treasury froze in the year 2020 at £175,000 – families are still paying inheritance tax on property way over and above what they used to. This means there is a lot more inheritance tax that families will have to pay (more revenue for HMRC) and less opportunity for the intended beneficiaries of the estate.
So with the threshold frozen where it is and with house prices only moving higher, there is significantly more inheritance tax on a house that families have to pay to HMRC (if not planned for correctly). To avoid inheritance tax planning will, therefore, be at the cost of the intended inheritance and the livelihood of the beneficiaries.
Inheritance Planning and Inheritance Tax Advice
So how can you mitigate this increased exposure to inheritance tax and keep as much wealth as possible in the family?
Here is a headline flowchart, if you will, of how inheritance tax planning can achieve that, although as this is a complex area you might want to speak with a financial adviser to be on the safe side:
- Ensure your Will is up-to-date (we can refer you to well-accredited solicitors)
- Make lifetime gifts to reduce the value of the estate (everyone has an annual gift allowance of £3,000 a year, which is free of inheritance tax and the rest is subject to what people refer to as the ‘inheritance tax 7 year rule’)
- Using a trust to protect assets – for example, installing trust-based solutions (such as Loan Plans and Discounted Gift Plans) so the donor retains income and/or capital whilst allowing for investment growth to be inherited by the beneficiaries and free of inheritance tax
- Put life insurance policies in trust to pay any inheritance tax that might remain
Family wealth takes a lifetime (or more) to accumulate. Yet a significant amount of it can be swept away at the drop of a hat. The ongoing assistance of a financial adviser can help you and your family prevent this from happening.
Are you or your family unsure of how to mitigate inheritance tax or how to keep wealth within the family? You can make an enquiry via our website for a no obligation consultation.
The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount initially invested.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Please note that where a referral to a service is made, it will be separate and distinct from the services offered by St. James's Place. Wills and Trusts are not regulated by the Financial Conduct Authority.
Got a question?
Do get in touch with us if you need a bit more information about these services, or any of our other financial planning advice.
