16th November 2015 at 5:00pm
As you may have seen recently in the media, capital taxes such as inheritance tax (IHT) and capital gains tax (CGT) are no longer restricted to just the wealthy.
In our property focused society, owning a house and shares because of an employer share scheme, is now commonplace. As a result many of us and our friends and family will be affected by these taxes, particularly on death.
Tax can prove an emotive subject even at the best of times, but when it comes to understanding what could be due when settling the affairs of a loved one, it can be a particularly sensitive area.
Putting plans in place
As with any tax the devil is in the detail, so today we’ll cover off some of the key points around IHT and when it can impact.
In a future issue we’ll delve deeper into CGT.
When do you have to pay Inheritance Tax?
IHT is usually paid on your estate when you die, if it’s over a certain value.
But you need to be careful here as not all assets are included for IHT purposes. Equally gifts made in the past that you thought were out of the equation, can come back into an estate up to 14 years later.
Currently the IHT threshold, also known as the ‘nil rate band’ (NRB), is £325,000 and IHT at 40% is usually paid on anything above this.
However, if you don’t use all of it when you die, what’s left can be carried forward for your spouse or civil partner. So if you are married or in a civil partnership, you could potentially have a £650,000 threshold before IHT is payable.
What do I need to do?
You really need to take action before it’s too late
One of the first things you’ll need to do is determine the possible value of your estate.
Sit down and make a list of all your assets – this includes all property (both in the UK and abroad), investments, bank accounts, life insurance etc.
Where something is jointly owned, such as the family home, factor in only half the value.
Any private pension provision you have is usually not included in your estate for IHT, but some very older policies going back to the 1980s may not be exempted.
Equally you have to look at gifts you have made over the past 7 years. An outright gift, whether of money or an asset, is usually referred to as a Potentially Exempt Transfer.
If you survive the 7 years of making that gift it is exempt, but if you die within 7 years there may still be a liability.
Once you’ve established the broad tax position, there are things you can do to mitigate any tax, such as transferring assets in your sole name from you to your spouse or holding them in joint names.
Such a transaction is one of a range of exemptions that are available, for example, everyone has an annual gift allowance of £3,000 and there are specific exemptions for gifts made on marriage, and then there’s gifts made from regular income rules that can be help.
A willing testimonial
Another important action you can take is to make sure your affairs are in order. Do you have a will? If yes, when did you last review it?
If you die before making a will, your ability to control who benefits from your estate is taken out of your hands and laid down by the government.
This is known as dying intestate i.e. without a legally valid will.
The government has set out rules to show how your estate will be distributed. By not controlling who benefits, you also can’t control any IHT liability that may arise.
Equally because of the pension freedoms that came in earlier this year, pension nominations should be revisited to make sure they are still appropriate to your circumstances.
Otherwise you could be missing an opportunity to leave a lasting and tax-free legacy to your family.
A legacy worth leaving
Putting all of this together you can see that this is a complex area, so if you find your assets add up to more than £325,000, it’s worth considering taking advice?
The tax implications and cost of not having a structured plan could far outweigh those of some advice. You want your loved ones to remember you for all the right reasons, not the wrong ones.
In a future issue we’ll go into how to administer an estate should the worst happen.
Join the conversation
The information in this blog or any response to comments should not be regarded as financial advice. Pensions are investments and their value can go up or down and may be worth less than you paid in. Laws and tax rules may change in the future. The information here is based on our understanding in November 2015. Your personal circumstances also have an impact on tax treatment.