A tax for the rich?
When estate duty was first introduced, it was only paid by the seriously rich – it was a tax for the aristocracy. Increases in the value of property have made IHT a tax now paid by millions of inheritors in the UK.
The rate of IHT payable on a deceased’s estate is 40% – that takes a sizeable chunk of the assets once the threshold is reached.
|Chargeable Estate in 2012/13||Tax Liability|
A perfect tax?
Some people might argue that IHT is the perfect tax: you pay it only when you’re dead, so why worry? The money you would be leaving to your children is simply extra cash for them which they haven’t earned, so they should be happy with their 60%. If you believe that, you don’t need to do any planning for IHT.
An alternative view
Some people think they should be able to hand on their life savings to their children without the State taking a shovelful out. After all, the State has had income tax while you’ve been earning it, so why should they have another go when you pass it on?
If that’s your view, read on.You will need to think about whether your estate is liable to IHT, and whether you can do anything about that.
What are you worth?
The starting point is to make a list of your assets. It’s the current market value that is charged when an estate passes on – not what you paid for things. House price inflation is the factor that has put so many people into the IHT bracket.
What you are worth may not be obvious. You are allowed to take off debts you owe such as a mortgage on your house, but might they be paid off by insurance on your death? You may not think of your life insurance policies as “your wealth”, but they will count towards your estate if the proceeds are payable to your personal representatives.
If you have made substantial gifts in the last 7 years, these will use up some of the nil band if you die, so they should also be taken into account.
Making a proper list and putting realistic values on it will give you an idea of the IHT that you would pay today, and it gives you some idea of what you might pay in the future. Bear in mind that values of many investments have taken a knock in the recession – think about what your estate might be worth if we return to more normal times.
Some people might argue that IHT is the perfect tax: you pay it only when you’re dead, so why worry?
Where’s it going?
The most important thing to decide is where you want the money to end up. Might you need to spend it yourself during your lifetime? Do you want to give some to charity? If you are married or in a civil partnership, you will want to make sure that the survivor is properly provided for.Then you may want to leave the rest to children or to other relations. The next thing is to decide when you think it ought
to get there. You might not want to give money straight away to your children, even if you don’t need it, because they might be too young to handle it. When you have a clear idea of what you want to do with your estate in the long run, you can write a Will – or bring one up to date – taking IHT into account.
There are some things that are very easy to do to reduce IHT substantially. They mainly require action long enough in advance. If you wait, you pay.
If you have life assurance policies which will be payable to your own estate when you die, it’s possible to assign them to someone else or to a trust – then they won’t be liable for the IHT charge on the proceeds. If you have spare cash or assets which you’re sure you won’t need, you can give those away during your lifetime. As long as you survive seven years after the gift, they will escape IHT. A silver
lining in the present economic downturn is that it provides an opportunity to give assets away when values are low, reducing the exposure to IHT later.
Business property can currently enjoy a 100% relief from IHT. If you run a business, maximising the value of it is good IHT planning.
Although Trusts do not enjoy the low tax rates they once did, they an still save tax and protect children from the dangers of owning too
much too young.
There are other opportunities involving insurance policies, as well as a number of reliefs and exemptions that may apply in your particular circumstances.
How we can help
We can help you take stock of what you own and make a sensible plan for where it’s going. Most importantly we can explain the possible impact of IHT on your estate and review all the possibilities for reducing it. Remember, it’s not a tax for the rich – it’s a tax for the unprepared.