The Budget 2013: Inheritance Tax (IHT)
Article published on 18th April 2013
So with the Budget 2013 it seems as if existing home owners are once again going to be ignored for any tax breaks. It often seems as if there is no benefit in working hard, saving your money and investing it for your family so that they have added financial security once you pass.
The following article discusses what is included in the calculation of Inheritance Tax upon your death and measures that you can take to protect your loved ones from this potentially large bill. Inheritance Tax must be paid within six months of your passing.
George Osbourne has kept Inheritance Tax at a limit of £325,000 per person until 2018. This means that if your estate is subject to Inheritance Tax anything above the value of £325,000 will be taxed at 40%. Have you considered how your benefactors would pay for this tax?
My estate is nowhere near £325,000, why does this matter to me?
Hitting the £325,000 tax bracket may not be as far off as you think. In order to calculate the value of your estate, your family will need to establish the worth of your:
- Bank accounts
- Businesses and related assets
- Life Insurance policies (unless written into Trust)
- Foreign Assets
Outstanding liabilities held by the estate are deducted from the value of your possessions before Inheritance Tax is applied. However, the new Budget includes measures to stop some tax loopholes that have meant that liability deductions have been abused in the past.
How can I prepare for Inheritance Tax?
There are a number of ways that you can prepare your benefactors for Inheritance Tax. One option is to plan early and gift money to your family before the worst happens. Another option is to take out a Life Insurance policy that will cover the potential Inheritance Tax bill. There may be other options more suited to your individual circumstances that a Wealth Management Consultant could advise you further upon.
A straightforward way is to the take out a Life Insurance policy that is written into Trust for your benefactors. Ideally you would apply for a Whole of Life Insurance that is written into Trust, that will give your benefactors a lump sum payout to cover the Inheritance Tax bill. In the event of your death the lump sum will be paid to your nominated beneficiaries through the Trust, giving them the funds to pay for the Inheritance Tax bill.
It should be noted that the Inheritance Tax bill cannot be paid from the deceased estate, so having the cash inflow from the Whole of Life Insurance would be of great help to your benefactors. The main benefit of the Whole of Life Insurance policy is that it is guaranteed to payout upon your death, as long as you continue to pay the premiums.
How does Inheritance Tax work between a married couple?
A married couple probably have the best situation when Inheritance Tax comes into play. Upon the death of one of the couple the surviving partner is automatically allowed to inherit the deceased partners share of the estate with no Inheritance Tax being charged. The surviving partner also inherits the deceased partners allowance for the estate value before Inheritance Tax is applied. This means that the surviving partner is now able to pass on an estate of up to £650,000 to their benefactors before they are charged Inheritance Tax.
In order to receive the transfer of the Inheritance Tax exemption you must apply to the HMRC to officiate the new allowance, upon the death of the surviving spouse. Estates worth under £650,000 are generally classed as 'excepted estates' and the threshold can be transferred. In order for an estate to be an excepted state it must:
- Be valued at £650,000 or less and have a 100% transfer of unused Inheritance Tax allowance left over from the first spouses death.
- Have a value of ?325,000 or lower.
- Be an inherited estate between a married couple or registered civil partnership; the total estate value cannot exceed £1million.
- Be an estate valued at £150,000 or lower, that is situated within the UK, and owned by a UK citizen who lives abroad.
The automatic transfer of any unused inheritance threshold between partners will not be permitted:
- On estates worth above £1million.
- Where assets of £100,000 are held outside of the UK.
- If gifts of over £150,000 were made in the seven years proceeding the death.
- Where the payment of a Life Insurance policy has been made to a beneficiary other than the immediate partner.
This is by no means an exhaustive list of the rules of Inheritance Tax transfer and we would strongly advise that you speak to a financial advisor about your estate planning.
Non-UK individuals who live and are married to a UK citizen can elect to be included within the Inheritance Tax system; this cannot be removed unless they live outside of the UK for four consecutive years. For individuals whose spouses do not live within the UK the Inheritance Tax threshold for their estate has been increased from £55,000 to £325,000.
I am in a civil partnership how will Inheritance Tax affect my partner?
If you have been through a Civil Partnership ceremony you will be treated the same as a married couple when it comes to Inheritance Tax. However, if you have not made your partnership 'official', then you and your spouse will not receive the same Inheritance Tax breaks as a married couple.
Can I mitigate Inheritance Tax?
There are ways in which you can reduce the likelihood of your family paying Inheritance Tax but there are no guarantees that they will work.
In order to reduce the value of your estate to £325,000 or under:
- You can receive an Inheritance Tax exemption on any donations to charity, political parties or national institutions (within specified limits).
- You can receive an Inheritance Tax exemption on any gifts to your partner - this is available to married couples or those with a registered civil partnership, living in the UK.
- You can gift up to £3,000 per annum to an individual friend or family member - any unused allowance can be carried forward to the following tax year.
- You can gift up to £250 per annum to however many friends or relatives that you like.
- You can gift up to £5,000 to your child should they become married or register a civil partnership. Grandparents can donate up to £2,500 and anyone else can donate up to £1,000.
- Gifts for Christmas, birthdays, anniversaries and other religious celebrations are exempt.
- Gift part of your estate to your inheritors - if you die within seven years of the gift, Inheritance Tax will still be applied, at a reduced percentage for each year that has passed.
- You may be able to put money into Trust for a disabled benefactor or child, but this is not always allowed.
- You may receive Inheritance Tax relief on businesses, woodland, farmland and National Heritage properties.
You normally cannot mitigate Inheritance Tax by:
- Gifting your property to your children and continuing to live there.
- Placing your money within a Trust. This is different to writing a Whole of Life or general Life Insurance policy into Trust, which are exempt.
If you are in any doubt about the strategies that you have taken to reduce your families Inheritance Tax bill upon your death, speak with an independent financial advisor as soon as you can.
Top Quote UK Financial Services do not take any responsibility for the content of this article and information has been sourced from the sites listed below. We do not currently offer financial advice on Inheritance Tax planning, but we can direct you to a fully qualified Wealth Management Consultant who can provide advice in this area.
The Financial Conduct Authority does not regulate Inheritance Tax Planning
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