Inheritance Tax can cost families hundreds of thousands of pounds but with careful financial planning this can be significantly reduced or avoided altogether.
What is Inheritance Tax?
When someone dies, the value of their estate is calculated – this includes all property, investments and savings. Inheritances between married couples are not normally liable to inheritance tax, but where you are leaving things to an unmarried partner, children or anyone else, then your estate will be liable to inheritance tax, if the total value is more than your Nil Rate Band.
The Nil Rate Band currently stands at £325,000, with 40% tax payable on the value of the estate above that level.
Example: Chris Smith is divorced and his home is worth £550,000 and he has savings of £75,000 with a total estate value of £625,000 and he is leaving everything to his daughter June. After deducting the nil Rate Band of £325,000 this leaves £300,000 on which tax of 40% is payable. The tax payable would be £120,000. June doesn’t have sufficient savings herself and so she has to sell the property to pay the tax and is left with £505,000.
As the Inheritance Tax Nil Rate Band is now frozen until 2019 and the value of your assets is likely to rise, your estates’ liability to Inheritance Tax is most likely to increase.
Inheritance Tax is also applied to lifetime gifts to trusts, if they exceed the Nil Rate Band and can result in an immediate tax charge.
Solutions to reduce Inheritance Tax
There are a number of options to avoid Inheritance tax that involve gifting assets either directly or into a Trust, however these are often unpopular because you will no longer have access to the money should you need it and you would need to live for another 7 years for the gift to be considered outside of your estate and thus not liable to inheritance tax.
You could take out a life assurance policy which would provide a lump sum payment which your beneficiaries could use to pay the inheritance tax bill. This is a popular option where someone is still in good health and the majority of the estate’s value is in the family home. But premiums can be very expensive and if you have had any major health issues it may not be possible to get cover.
Inheritance Tax Investments
An attractive option is investments which benefit from Business Property Relief. Shares in many British companies not listed on the main stock exchange qualify for Business Property relief.
Assets which qualify for Business Property Relief are exempt from Inheritance Tax provided you hold the asset for at least 2 years. You have complete access to money should you need it – either to withdraw a lump sum or an income from it should your circumstances change.
This is not a tax-loophole; this legislation has been in place since 1986 and the Government provide the tax relief as an incentive to encourage people to invest in British businesses.
This particularly appeals to those with savings available to invest, who do not need the money now, but may be concerned about potential costs of care in the future.
How do you invest?
Deciding which companies to invest in yourself would be time-consuming and very high-risk. Thankfully there are investment companies who specialise in this area and have put together portfolios of these companies specifically aimed at those looking to minimise there IHT liability.
How Aspect 8 can help
We will help calculate the value of your estate, and any potential inheritance tax liability and discuss the options with you for minimising inheritance tax.
Please note the FCA do not regulate general taxation advice.