Tax seems to be a familiar word nowadays, with more people looking at different ways to save on tax, and researching possible tax benefits and reliefs that they may be entitled to.
But when we hear the words Inheritance Tax (IHT), it can be something that we automatically assume we don’t need to think about yet, with the mind-set of “It will be their problem, not mine,” at a later date.
Delaying plans for your family’s inheritance could cause implications, and if plans aren’t put in place, it’s possible HMRC could become one of your main beneficiaries, and can take up to 40% of what you leave behind. Another possible outcome is that your family may have to sell their home in order to settle any IHT.
Like most things, it’s always better to plan. That’s why we’ve asked Shannon Minor, Tax Manager to share her top tips on what should be well-thought-out when it comes to inheritance planning.
Over to Shannon…
As said above, it’s better to plan for these things in advance, so you have peace of mind for your family when your time inevitably comes. You may be unsure of what you need to think of when it comes to inheritance planning and may not be aware of possible outcomes that can help you to avoid paying unnecessary tax. There are many different reliefs you may believe you are entitled to, but upon planning might discover otherwise.
To ensure you are on top of your inheritance planning, below are some key points I believe you may want to consider to benefit not only your family, but yourself too:
If you are in the fortunate position of being able to pay for private education fees, gifting the money for educational purposes can be a tax-efficient way to provide for your grandchildren.
It not only allows your grandchildren to potentially experience the best education available, but can also help to reduce the level of your estates, meaning your exposure to HMRC is decreased.
Your grandchildren may not be at the suitable age for private education just yet, giving you more time to be savvy with saving for their school fees. Saving through something like an ISA is a great way to help build up a pot of savings, and it allows you to have a lump sum of money that is exempt from certain tax obligations.
Trusts to protect your assets
Trusts are one way to keep control of asset protection. A trust is essentially a legal document where you give property/properties, investments or cash to another person, so that they can look after them for the benefit of a third person. For example, you may put some of your savings aside to grandchildren to use for a deposit for a house.
The two important roles in a trust are;
- Trustee– The person who manages the assets in the trust
- Beneficiary– The person the trust is set up for
When assets are put into a trust, ensuring specific conditions are met, they no longer belong to you. This then means that when you pass away, the value of the assets in the trust won’t be included when your IHT bill is worked out.
There are different types of trusts that can be set up, and they may have a minimum set up fee, so it’s important to choose the right one for you.
Some trusts may have higher rates to pay for income and capital gains tax, so it’s important to know what type of trust you have, as the kind of trust you choose depends on what you want it to do.
Gifting out of excess income
There is the option to make “Gifts out of income” which allows you to gain IHT relief. For gifts to qualify, they must form part of normal expenditure, and be made out of income whilst not reducing your standard living.
There are some conditions when it comes to gifting. The first condition calls for the gift to be part of the normal expenditure of the transferor. For the purpose of this exemption, HMRC accepts that ‘normal’ means normal for the transferor itself, not for the average person.
The term ‘normal’ takes its usual meaning, like standard, regular, typical or usual. HMRC’s guidance states the factors it will consider in looking at any pattern of gifts including the frequency, amounts, nature and reason for the gifts, as well as the identity of the recipient.
The second condition for exemption is that the transferor should have made the gift out of their income. This means that capital assets therefore do not usually qualify, and as income is usually received in the form of cash, cash gifts tend to be the most obvious format for this exemption. ‘Income’ is not defined, so is taken by HMRC as determined by normal accountancy rules and arising each year to 5 April.
Give to charity
If you have outlined in your will that you would like either assets or cash to be left to charity, this will automatically be free of any IHT liability.
If you leave a minimum of 10% of your total assets to charity, then the IHT rate on the remaining assets will be reduced from 40% to 36% as of January 2023.
It might be a good idea to review your estate planning periodically. Even the best laid plans can change- you might change your mind, your own needs may alter, and of course tax rates are always inevitable. The good news is we have experienced tax advisors here at DJH Mitten Clarke, whilst also partnering with financial planners Wealth Experts, to ensure we can provide the best strategy for you.
If you would like to discuss any of the points above that Shannon has highlighted, or you’re simply interested in getting some advice about inheritance tax, you can speak to one of friendly senior tax advisors by emailing email@example.com.