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Inheritance tax;
a voluntary levy for those who do not plan ahead

Most people today prefer to control how their money is spent

Roy Jenkins famously quipped "Inheritance Tax; it is broadly speaking, a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue". This may well be true in a few cases. However, most people today prefer to control how their money is spent, rather than leave it to the Chancellor of the day to choose which pet project your money is spent on.

Inheritance tax was designed to tax the estates of the wealthy, who had inherited their money in the first place. With the growth of home ownership, more and more people spend their entire lifetime saving by slowly repaying their mortgage. Unlike untaxed inherited wealth, we all know that the income used to repay you mortgage is taxed at 20%, 40% or even 45%. Therefore it would be very bad planning indeed if at the end of your life your savings [estate] are again taxed at 40%.

Is inheritance tax only for the wealthy?

General consensus suggested that people think inheritance tax planning is only for the wealthy. In fact nothing is further from the truth. Inheritance tax planning starts with making sure your Will is up to date, which should only cost a few hundred pounds with a local solicitor. Failing to write a Will can be catastrophic as not all assets will automatically pass between husband and wife. Dying intestate (without a Will) increases the time it takes to redistribute the estate and not necessarily to those you had intended. Therefore ensuring your Will is up to date is an essential part of estate planning.

We offer a free initial consultation that will help identify actions you can take to help avoid paying inheritance tax [IHT]. The simplest of these is making absolute gifts from capital. Again care should be taken, especially if gifting assets, as Capital Gains Tax [CGT] may be due on the full value of the asset, even if no money has been received. Again a few hundred pounds spent with a local accountant may save you thousands in the long run.

Inheritance tax Nil rate band

The current 'Nil Rate band' [NRB] will remain at £325,000 per person until the end of the 2020-2021 tax year. One point to consider when considering estate planning is not the value of your estate today, but the expected value at your date of death. According to the new life expectancy calculator on www.riskprediction.org.uk a male age 65 today could live another 17 years and a woman 20 years. Considering that your estate will double in value in 14 years with 5% per annum real growth; looking at the value of your assets in today's terms may lead to some serious miscalculations and little time left to deal with your inheritance liability later in life.

 

The chart this week is taken from the 2015 summer budget report and highlights the increased number of households that are falling into the Inheritance Tax thresholds. Inheritance tax is voluntary and can be avoided by simply planning ahead. Make sure that you are not added to this statistic.

Exeter Financial Advisor

Main Residence Nil rate band

The introduction of the Main Residence Nil rate band is more of an additional allowance to recognise savers.

The allowance will relate to the equity in the property only after any mortgage has been deducted. It can only apply to one property [the representatives can decide which property, if there is more than one in the estate]. However, the deceased must have been resident in that property at some time [rental properties do not qualify unless the deceased has resided there]. Also, the main residence nil rate band is only available to beneficiaries who are direct descendants of the deceased or their lineal descendants.

The Main Residence nil rate band became available from the 2017-18 tax year. Increases have been set until 2020-21 after which it is set to increase in line with CPI. For estates over £2 million the Main Residence allowance will be reduced by £1 for every £2 over £2 million.

Tax year

Main Residence Nil rate

2017-18

£100,000.00

2018-19

£125,000.00

2019-20

£150,000.00

2020-21

£175,000.00

These plans should reduce the number of IHT payers, but there will still be many more IHT payers than 30 years ago. The really wealthy will employ someone to help reduce their liability. If you are likely to become one of those 40,000 extra IHT payers, you should seek some advice sooner rather than later. Inheritance tax planning is not just for the super-wealthy. Tax treatment depends on individual circumstances and may be subject to change in future legislation.

 

 
 
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