WHO do you want to leave your worldly wealth to when you pop your clogs? Your nearest and dearest? A furry friend? Charity?
Unsurprisingly, the nation’s favourite beneficiaries are the ones closest to our hearts, with 87 per cent wanting their assets to go to family, according to Unbiased.co.uk, the financial advice website. Still, nearly 4.5m people want charity to benefit from their estate and 1.5m people want their pets to inherit their wealth.
Bequests to charities are free of inheritance tax (IHT), but that’s not so for other beneficiaries. Planning is needed to make sure you don’t end up leaving the taxman a sizable sum.
IHT is charged at 40 per cent on anything over the “nil rate band” of £325,000. The survivor of a marriage or civil partnership can claim up to 100 per cent of their partner’s allowance, giving them a threshold of up to £650,000 in the current tax year.
“This 2007 change made inheritance tax planning easier for many people, especially those looking to pass on property up to this value,” says Max Coleman, a chartered financial planner at financial adviser AWD Chase de Vere.
It might seem like a lot, but given the property boom of recent years, many houses – particularly those in prime central London – are worth far more. So, what can you do to mitigate this penal death tax?
WRITE A WILL
Firstly, have a valid will to ensure your assets are passed on as you wish.
Care needs to be taken in cases where a widow or widower remarries having claimed 100 per cent of the deceased’s IHT allowance. If he or she were to die before the new spouse, leaving everything to that person, one nil rate band would be lost, as the survivor can’t have three.
“Under these circumstances, the spouse who already has two nil rate bands should consider using will planning to gift up to the first nil rate band to someone other than the new spouse,” says Bob Fraser, senior client partner at wealth manager Towry.
GIVE AWAY ASSETS
You can gift up to £3,000 a year free of IHT or £6,000 if you didn’t make a gift of this kind in the previous tax year. You can also give £250 to any number of people every year, but you can’t combine this with the annual £3,000 exemption.
Parents can give £5,000 to each of their children as a wedding or civil partnership gift. Grandparents can give £2,500 and anyone else £1,000.
Coleman says: “In reality, use of these exemptions will not have a significant impact on the IHT liability of an estate valued at more than £650,000.”
You can also give away 100 per cent of income, provided it doesn’t affect your standard of living. Gifts to registered charities and political parties are also exempt.
KNOW THE SEVEN-YEAR RULE
You can make further tax-free gifts known as “potentially exempt transfers”, but you must survive for seven years afterwards. If you die within seven years and the gifts are worth more than the nil rate band, taper relief will apply (so, if you die within six years, the tax due will be less than if you die after one year).
You can give away most assets, including cash and shares, but these must be outright gifts from which you no longer benefit. This means you can’t give away your family home and continue to live there unless you pay a market rent.
SET UP A TRUST
Assets put into a “bare” trust – a trust where the beneficiary is entitled to the assets at age 18 – count as a potentially-exempt transfer.
Unless you are disabled, gifts into most other types of trusts are limited to the nil rate band, unless the settlor is happy to pay a 20 per cent immediate tax on the excess. A further 20 per cent is due if the person making the gift dies within seven years.
GET BUSINESS PROPERTY RELIEF
Consider investing in assets that attract business property relief, suggests Francesca Lagerberg, head of tax at accountant Grant Thornton.
These include most shares listed on AIM, the junior stock exchange. Holdings are free of IHT after two years, but Coleman warns that these shares can be “extremely volatile”.
Less straightforward, but it might be an option for someone with rural ambitions. Farmland qualifies for agricultural property relief of up to 100 per cent after two years of ownership, but you must actively work the land for “agricultural purposes” as a commercial business.
TAKE OUT INSURANCE
If all else fails, take out a whole-of-life insurance policy that can be used to pay your IHT bill. The policy should be held in trust to avoid the proceeds falling into your estate and increasing your IHT liability further.