We all want to ensure the security of our loved ones when we pass – and that’s exactly why Estate Planning should be considered well before you reach old age.
For the majority of us, our home makes up a large part of our estate. But with rising property prices and recent confirmation that the IHT nil-rate band (the amount you pay zero Inheritance Tax on) will be frozen at £325,000 until 2028 – many individuals may need to find ways to mitigate and protect the wider estate for future generations.
The key to minimising the amount of your estate liable for IHT is to be prepared. An effective, holistic approach to estate planning will make use of the various mitigations available, and as time goes on react to changes brought forward by Government.
Appointing and working with trusted specialists like Prosperity Law’s Private Client Team, will ensure you’re in the best position, with an estate plan that works for you. Here’s how we can help:
Assess how the inheritance tax nil-rate band affects you
Each individual has an allowance of £325,000 that qualifies for the nil-rate band, meaning you don’t pay any IHT on this amount. For estates valued higher than £325,000 – everything above that amount will be taxed, starting at the standard IHT rate of 40%.
Married couples and civil partners can pass their allowance on to their spouse when they die, meaning if you’ve lost your spouse you will therefore pay no tax on the initial £650,000 of your combined estate.
Qualifying for the residence nil-rate band
For those with estates valued above the nil-rate threshold, the first thing we’ll assess is whether you qualify for the residence nil-rate band. In 2017, the Government introduced this additional allowance, of £175,000, which is applicable to those leaving their main residence, or proceeds from the sale of their main residence, to their children or grandchildren.
Similarly to the main allowance, individuals can pass their unused allocation to their spouse or civil partner, meaning a couple could effectively have a nil-rate value of up to £1 million.
It’s also worth noting that for estates valued at over £2milllion, the residence nil-rate band will be tapered by £1 for every £2. This means that if your estate is valued at over £2.35 million, the residence nil-rate allowance will be negated.
Explore the use of tax-efficient gifts
If, after these calculations, part of your estate is still eligible for IHT, there are a number of mitigations that you might be able to make the most of.
The first of these, is gifts. Gifts that are exempt from taxation include:
- An annual exemption of £3,000 each tax year, which can be gifted to anyone.
- Each tax year you can give gifts for weddings or civil partnerships – £5,000 to a child, £2,500 to a grandchild or great-grandchild, or £1,000 to another individual.
- Gifts of £250 per person, per tax year (so long as that person hasn’t received another gift from you that maximises another allowance).
If there are significant concerns about gifting to young or vulnerable family members, assets can be gifted into trusts.
Any other gifts outside of the above will only be exempt from your estate if you survive for seven years or more, from the time of gifting.
Ensure pensions are maximised
Pensions can be an incredibly effective way to pass on wealth to your family, in the event of your death.
For those with a defined pension contribution scheme, who haven’t bought an annuity unspent money in that pension pot will be passed to your family, upon the event of your death. And if you’re under 75, these benefits can usually be passed on tax free.
However, if you’re over 75, these benefits will be taxed in line with the rate of income tax, in-line with your beneficiary’s earnings, so in such cases there may be better ways to pass this on.
Consider propriety of whole-of-life insurance to cover future IHT
For those who have used all the mitigations available to plan accordingly, and yet part of their estate is still liable for IHT, there is an option to use whole-of-life insurance to cover part of all of the tax owed, upon your death.
But there are key things to remember, namely that a life insurance policy payout can actually be tax liable as part of your estate, if not put into trust. For those with a policy in trust (meaning it’s not counted towards your estate), that payout could indeed go some way to covering Inheritance Tax owed by your family.
If you want to have an initial, confidential discussion with our expert team, please get in touch with Head of Private Client, John-Paul Dennis on JPD@ProsperityLaw.com We’d be happy to help you to create an effective estate plan and leave a tax-efficient legacy for your family and loved ones.
