Tips for navigating the inheritance tax
It’s probably feared by many and understood by few. The inheritance tax can be a pain for many families, with an added mix of rising property prices, increased household wealth, inertia and pure ignorance resulting in more and more people being stung by this often unexpectedly brutal law.
The latest data from the Revenue revealed that inheritance tax receipts had totalled a whopping £5.2billion in the tax year to April 2018. This figure is expected to amount to a record £6.5billion in the current tax year. Judging by this alone, it's safe to say that the impact of this aspect has a far-reaching arm that runs across the board.
So, how can you rise above the struggles of the inheritance tax and what are the unpleasant surprises to watch out for when it comes to dealing with this financial landmine? Here are a few ways you can be better prepared.
First off, what is it?
For those who still aren't familiar with the concept, the inheritance tax can best be described as a tax on a dead person's estate. Simply put, it's HMRC taking a slice of the deceased's property, money and other possessions. While this dreaded tax mainly focuses on when someone passes away, you'll still possibly have to pay it on property, money and other possessions that were handed to you by the deceased while he/she was still alive.
Reduce IHT threat by planning ahead
The frightening part about Inheritance Tax is how people typically sleepwalk into the predicament, sometimes for no reason other than the fact that they refuse to think about their own mortality. Many of the safety measures are simple to implement and could end up saving families thousands of pounds. A little bit of financial planning and perhaps a touch of expert guidance could add some certainty to your financial future.
Make sure you draw up a will that helps ensure that assets are passed on to beneficiaries. Without a will, your assets may be divided according to prescribed rules and not your wishes. Consider finding a financial advisor who’s experienced in IHT to help you protect your assets.
Consider utilising the seven-year rule
As it goes, you may be able to avoid paying inheritance tax if you receive money, property or other possessions as gifts and the person who gives it to you lives for at least seven more years. It's also called the 'potentially exempt transfer' since it'll only be revealed if it's actually tax-free in seven years' time.
The deceased can't give more than £325,000 in the seven-year period in order for the exemption to hold. With all that being said, you may not necessarily pay the full 40% tax if the person dies before the seven years are up. Potentially exempt transfers are taxed based on a sliding scale that's determined by how long it's been since you received the gift.
Gifting can reduce a future inheritance bill
Through the gifting of money or personal possessions, you may simply be able to reduce the damage blown by the inheritance tax. The way it works is straightforward; a series of gifting allowances currently exist, with an annual exemption that allows a maximum of £3,000 to be gifted every tax year (among as many people as you want). This may be streamlined in the future as a way to simplify the tax regime but for now, it stands as a viable solution.
Gifts can be made to children, grandchildren of friends who get married with a maximum of £5,000, £2,500 and £1,000 respectively. The only restriction is that the gift can't be made to someone who has already received a gift from you under a different exemption in the same tax year (like the annual exemption for instance).
Handle inheritance tax or, at the very least, minimise its detrimental impact on yourself and your family. Consider these tips and take the necessary measures to protect yourself from IHT because if you don’t, there’s a very real possibility that it’ll affect you or someone very close to you.