Want to avoid IHT of 40% on your estate?
More and more people are getting caught by an Inheritance Tax Bill on their estate upon death. Houses prices have rocketed over the last few years meaning that most peoples homes are worth more than the current Inheritance Tax nil rate amount of £275,000. Inheritance Tax (IHT) is not chargable if your total assets on death are worth less than £275,000, over this figure you have to pay a tax charge of 40% to the government on all assets you hold. The only exception is if you are passing the assets to your spouse where No Inheritance Tax is payable. However when your spouse dies Inheritance Tax will most likely be payable on passing those assets to other members of the family if they exceed the nil rate band at that time. |
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For individuals who are domiciled in the UK, Inheritance Tax applies to all their property whether it is situated in the UK or elsewhere. This means that if you have a holiday home abroad, this will be subject to Inheritance tax if when included in your estate on death, your assets are above the Nil Rate Band of £275,000.
We will now look at an example to show you how much Inheritance tax you could end up paying.
A Male Age 65 has the following assets:
- House worth £400,000
- Car £ 30,000
- Chattels £ 65,000
- Bank £ 50,000
- Investments £ 55,000
- Life cover £200,000 ( Not in Trust)
- Total Assets £800,000
£800,000 less the Nil Rate Band of £275,000 = £525,000 taxed at 40% = £210,000 Inheritance Tax Bill.
His beneficiaries will therefore only receive £590,000 on his death. If this figure was split equally between his 3 children they would each get £196,667. Meanwhile the government has taken £210,000 in Inheritance tax. This is more than the children were given individually.
So what could he do to reduce this Inheritance tax bill ?
He should have made sure the life cover was in trust for his children. This would have mean't the policy was paid out to his children outside of his estate, and therefore no Inheritance Tax would have been payable.
His estate would have been worth only £600,000. Less the Nil Rate Band of £275,000 = £325,000 taxed at 40% = £130,000 Inheritance Tax Bill.
He could therefore have saved £80,000 in Inheritance tax just by making sure he had put his life cover in trust.
So the key question is What can you do to avoid this happening to you?
There are some very good ways to avoid paying Inheritance tax depending on how much control you wish to retain over your assets. Some people are happy to pass assets to their family now, and lose control of them while they are alive. Other people would prefer to have the option to retain control over their assets while alive, and have access to the money if they need it.
The good news is that there are ways to do both, an example of some of the things you can do are shown below;
- If you wish to give away your assets now you can look to gift the money and as long as you live for 7 years these assets will fall outside of your estate. ( See Discounted Gift Trust below)
- If you wish to retain control of your assets you can loan the monies to a trust set up for your family, this will enable you to gain access to your original capital with all growth on the money being outside of your estate.( See Loan Trust below)
Nil Rate Band Wills
To make the transfer of assets from husband to wife or vice versa more tax-efficient, you should consider ways to use both yours and your partners nil-rate bands. The easiest way to do this is to write wills that leave a legacy equal to the nil-rate band to your children.
Say a couple have a joint estate worth £1m. If the husband dies first his share of the estate automatically passes to his wife.
When she dies the couple's children would inherit the whole £1m estate. They would be liable for Inheritance Tax on the £725,000 over the-nil rate band and face an Inheritance Tax tax bill of £290,000.
Instead the husband could leave £275,000 to his children and the remainder to his wife. At this stage there would be no Inheritance tax to pay. When the wife dies she would leave an estate worth £725,000, which is £450,000 over the nil-rate band. The children would have a tax bill of £180,000, thus saving £110,000.
Nil-rate-band Discretionary Trust
Nil-rate-band wills work with liquid assets such as cash and investments. When these are handed over to your children on the first death you lose control of them. If most of your wealth is tied up in your home or you want more control, you need a more complex arrangement called a nil-rate-band discretionary trust.
You remake your will and leave £275,000 worth of your home or other assets to a discretionary trust set up for your spouse and children on the first death. If the husband dies first, the whole house passes to his wife and she can continue to live in it but she owes a debt worth £275,000 to the trust.
When she dies, this debt is deducted from her estate, cutting the amount of Inheritance tax paid.
Discounted Gift Trust
You make a gift into a single premium insurance bond for your children and fix how much income you will draw from the fund until your death. If you survive for seven years the bond does not count as part of your estate. Even if you die within the seven years you should get a discount on the Inheritance Tax payable.
For example, If you are male, age 70 and draw 5% a year from a scheme, about 45% of the trust's assets could fall out of your estate as soon as a gift is made. The discount rate that is applied is decided on an individual basis by the insurance company that you select for your discounted gift trust, the rates offered will vary depending on youe age and gender.
Loan Trust
Loan trusts are an alternative to Discounted Gift Trusts if you want more flexibility over your income and capital. You lend money to a trust rather than give it away. The trust can repay the loan in regular instalments, providing you with an income. This amount is not fixed, as it is with a discounted gift scheme. Also, you can order the trust to make a repayment, including the full capital, on demand at anytime.
When you die, any outstanding loan forms part of your estate and is liable for Inheritance tax, but all investment growth falls out of your estate.
Annual Exemptions
You should look to use up your annual exemptions to remove assets from your estate. For example did you know that you can gift £3,000 annually to family or friends which is exempt from Inheritance tax.
Inheritiance Tax Planning is a very complex area of financial planning, and you should really talk to an Inheritance tax specialist to find out the best ways to plan for your own circumstances.
We are more than happy to talk to you, and give you a Free Initial Consultation from one of our Inheritance Tax Planning Specialists. Please take some time to complete the form below if you would like to find out more about Inheritance Tax Planning.
