Author Richard T Lishman, Managing Director of money4dentists, a firm of specialist Independent Financial Advisers who help dentists across the UK manage their money and achieve their financial and lifestyle goals.
Inheritance tax has been a widely discussed topic since the Summer Budget 2015. As inheritance tax (IHT) is payable on everything that is left within a person's estate above the tax-free limit, it is important to know what it is, what's changing and ways to reduce – where possible – liability to inheritance tax.
As it stands, the rate of inheritance tax is 40% on anything above the threshold and is usually paid by the 'executor', the person named in the will, or by the 'administrator' of the estate, the person who deals with the estate if there is no legal will. It does not apply to transfers between married couples and civil partners. However, for those planning on leaving an inheritance to other family members or friends, it is worth noting that IHT is not normally required – though as you would expect, there are some exceptions.
In the Summer Budget declared in July, the first Conservative Budget in 19 years, the Chancellor announced many reforms that will take effect as of April 2016 – including changes to dividend taxation, pensions, employment allowance and income tax.
As of April 2017, there will also be changes to the inheritance tax threshold – which will be the first alteration since 2009 when the coalition government froze it at £325,000. Thanks to Mr Osborne's decision to initiate a new main residence allowance, which will be a transferable nil-band rate that will work alongside the existing IHT nil-rate band, direct descendants will see an increase from £325,000 to £425,000. What this essentially means is that children, grandchildren, adopted and foster children and step-children of the deceased will see a £100,000 increase to the threshold amount. Unfortunately, nieces and nephews do not fall under this classification, which may affect plans for some when it comes to naming the 'executor' of the estate.
After that, the total IHT exemption will rise in £25,000 increments, until the threshold reaches £500,000. Furthermore, married couples and civil partners are allowed to pass their assets on to each other tax-free. This effectively means that married couples that own a joint home will be able to pass on an estate with the IHT threshold totalling an astounding £1 million. This is very good news for UK dentists and their families. Even estates of a larger value can expect to see substantial savings. For example, for estates worth £1.5 million, inheritance tax under the current rules would total £340,000. As of 2020, only £200,000 will be due – a considerable saving indeed.
How To Maximise Money
Despite these positive changes, it wouldn't go amiss to know exactly how further savings could be achieved through proactive mitigation. One effective way is to protect life insurance policies. Indeed, by writing a policy under a simple trust arrangement, one could prevent the proceeds from forming part of the taxable estate. While it may not remove the IHT liability, the pay-out from the life insurance would make it easier for surviving family members to pay the amount of tax due – in the long-run this could save the family home from being sold. The important thing to remember is that the pay-out must go into a trust. If it doesn't, it will make both the estate and the amount of tax owed larger.
Similarly, one could choose to deposit a sum of money, property or investments into a trust. By making inheritance tax-free gifts into a trust, it allows the depositor to remain in charge as the trustee should they wish to decide how the trust assets should be invested.
Another alternative to mitigating IHT is to make a gift. Known as the 'annual exemption', an estate can give up to £3,000 worth of gifts before IHT is due. In some cases, such as giving wedding gifts and making donations to charities or political parties, the estate doesn't have to pay inheritance tax at all. It is worth noting, however, that when the monetary amount given in gifts surpasses the nil-rate band in the final seven years of life, tax is due on everything over that threshold.
While there are certain solutions that can be actioned to reduce IHT liability, it is important to remember that this is a complex and complicated area and is not to be taken lightly. Indeed, before the Summer Budget changes come into effect, it would be prudent to gain more information on inheritance tax and options available in reducing it. Consulting trusted Independent Financial Advisers, such as those at money4dentists, could give you the insight and guidance needed for such a time.
It may be a way off yet, but putting a plan in place now could save time, effort and money. Be ready for the inheritance tax changes – get advice before it's too late.
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