Have you made your plans yet?
Benjamin Franklin famously said that 'in this world nothing can be certain, except death and taxes'. Inheritance tax neatly encompasses both of these subjects, but does that mean it is certain? We are here to help, by laying out a quick primer on how to best plan your inheritance if you are over 60 in the UK.
What is inheritance tax?
It is a tax on all your possessions after you die. Your entire estate, including savings and property will be taxed by the government if it exceeds £325,000 in value. Anything over this amount gets taxed at a rate of 40%. This means that for every £100 you have over this threshold when you pass away, the government takes £40 leaving your heirs with only £60. As you can no doubt see from this small example, this can seriously affect the amount of money which you will be able to leave your friends and family after your death. Since many people do break the £325,000 mark when they take into consideration the value of their property, the amount of tax being drawn in from this source each year is huge (£3.3 TRILLION
in the 2013-14 tax year).
As with most taxes, this money goes towards good services like the NHS, but can also be used to finance military action. If you would like to minimise the amount of money the government takes from you then you are in luck, we have some tips for you.
The best way to ensure that your chosen heirs receive as much of what you bestow them as possible is to give them their inheritance before you die. Once you make a gift, regardless of size, it gets classified as a 'potentially exempt transfer'. This means that the amount of inheritance tax that the beneficiary pays is variable and depends on how long you live after giving the endowment. If you live for seven years or more after the gift is made then the inheritance tax due on the gift becomes zero! The sliding scale of tax depends on how soon you pass after giving the gift, it works as follows:
• Within Three years – the full amount of inheritance tax is due
• Between Three and four years – 80% of the inheritance tax is due (32% of the total amount given if estate is over £325,000)
• Between four and five years – 60% of the inheritance tax is due (24% of the total amount given if estate is over £325,000)
• Between five and six years – 40% of the inheritance tax is due (16% of the total amount given if estate is over £325,000)
• Between six and seven years – 20% of the inheritance tax is due (8% of the total amount given if estate is over £325,000)
So as you can see, the best possible outcome financially for the receivers of your gifts is that you live for seven or more years after giving.
The benefits of giving are not only limited to your friends and family, giving to your spouse or civil partner can also be very beneficial. Gifts made to your spouse or civil partner are immediately exempt regardless of how long you live after the gift. This means that an unexpected bout of ill-health does not need to scupper your plans of making tax-free gifts. Making regular gifts can also be useful. You can give £250 to as many people as you want each year and it will not count towards your estate and will always be tax-free. This can be especially good for those inheritors who you are intending to give a smaller amount to. A £250 gift for four years will grant the same amount as £1000 in one go and will not be taxed.
If you are less concerned about your estate passing completely to family or friends, but do want to avoid as much tax as possible, then it may be worth considering a charity in your will. If you donate 10% or more of your estate to charity then the remaining excess over £325,000 will only be taxed at 36%. The difference between 40% and 36% may not seem a lot but on an excess of £100,000 its an extra £4,000 saved.
However, that does not mean that you should start giving away all your possessions immediately. It is very important that the over 60s consider their own finances in a realistic manner before giving away their estate. If you are just beginning your retirement then now is not the right time to gift money or property, you should wait to see how your retirement goes. This will give you time to work out how much money you need for yourself, and how much you can afford to part with. Since many inheritors may use the money they are given quickly to invest or use for property, it can put a lot of strain on your friends and family if you realise that you do no have enough money to live on.
As we have already discussed, giving to your spouse or civil partner allows for an exemption from tax. There is another point where it is important to choose your heirs correctly.
When writing your will its is important to bear in mind the Residence Nil Rate Band. Introduced in 2017, this is intended to help people pass on their homes to their nearest and dearest. Currently the Residence Nil Rate Band means that you get an extra £100,000 of leeway on your estate before you start paying inheritance tax. However, this is only made available if you leave your home to your children or grandchildren. This includes step-children, adopted children, foster children but not nieces, nephews or siblings. If you do this then you will not pay any tax on an estate less that £425,000. This threshold is set to rise even further and should allow you to have an estate of £500,000 by 2021.
Property bestowing has an important caveat. If you choose to give your property to one of you family members before you die then you will have to move out. If you do not it may never be considered tax-exempt, regardless of how long you live after the gift is made.
Whilst it is difficult to fully avoid paying inheritance tax, we hope that this article has helped you minimise the amount the taxman takes. If you have any concerns about your estate, then you should seek out a trained financial adviser who are usually able to help you escape inheritance tax as completely as possible.
Copyright © 2017 Peter Meyer and OverSixties.co.uk All Rights Reserved.
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