It is simple to overlook the significance of Inheritance Tax preparation with all the economic doom and gloom, the cost of living growing quickly and expected to rise even faster, double-digit inflation, and volatile global financial markets.
The Inheritance Tax-free Bands have not kept up with the rising cost of housing. Since April 2009, the Inheritance Tax “Nil Rate” Band—the sum you can inherit before paying tax—has remained at £325,000. This amount decreases each year in actual terms due to inflation.
A record amount of inheritance tax has lately been paid to the government.
In April and May of this year, the Treasury collected more than £1 billion from inheritance tax, an increase of 10% from the corresponding months in 2017.
It would be unwise to place too much hope in any upcoming Inheritance Tax adjustments. While a new prime minister may be on the way, he or she will be constrained by the current fiscal crisis, which includes shortages and massive post-pandemic government debt. Politically, no one can predict which direction the government will turn, especially since elections are not required until 2024.
The view of inheritance tax as a burden on the wealthy has changed as a result of growing housing costs and stagnant tax thresholds. People who have what they consider to be an average home and some funds will be required to pay inheritance tax. Given that you have already paid taxes on your salary and pension, it seems unfair.
What can be done?
First, check that your will is current and takes into account the tax-free “Nil Rate” Bands that are available, especially the new Residential Inheritance Tax-free Band, which, if all requirements are met, can add an additional £350,000 tax-free to the inheritance of a couple with children.
Take a second to review all of your assets, including your home, investments, life insurance, pension, and death in service benefits. For the purposes of inheritance tax, some assets pass outside the estate.
Calculate the amount of inheritance tax that would be due on your estate once all tax-free bands, exemptions, and reliefs have been taken into account.
On assets that pass between couples, no tax is due. When the second spouse passes away and their children inherit the assets, the tax is typically due. This implies that parents will have less ability to transfer assets to their children, such as for a home purchase.
Inheritance on some lifelong transfers and gifts, primarily on gifts to trusts, tax is also due. Tax planning is achievable in this area as long as you leave yourself with enough money to live on for the rest of your life because on gifts to persons, tax is often only due if death happens within the first seven years. Gifts to most political parties and recognised charities are likewise exempt.
Additionally, certain commercial and business assets and agricultural property are eligible for relief. The tax deductions are generous in that they can cover up to 100% of the asset’s value, but they come with very stringent requirements that must be adhered to.
If you have one, speak with your independent financial advisor. Certain Inheritance Tax planning is centred on particular investments, such investment bonds. Additionally, shares on the AIM (Alternative Investment Market) are taxed favourably. As long as the shares are held for more than two years and certain other severe requirements are met, such as the requirement that the firm be actively trading, AIM shares may qualify for tax relief of up to 100% of the value.
Tax planning should never be the only factor considered when making an investment decision. A reasonable overall return on the capital must be offered by the investment. Particularly AIM shares might be very dangerous. You must consult specialised professionals.
A good time to think about your tax liability and how you may lower it for the next generation is during the summer months, when many people’s busy work schedules tend to slow down a bit. The most crucial thing is to follow expert guidance.