Don't leave it to your family to pay - plan ahead to reduce inheritance tax whilst you still can
Do you have any idea what will happen to your possessions after you die? Have you made a will?
In fact, 30% of people don't even start planning until they reach 55.
Many wait until they have retired before considering writing a will.
Do you have any idea what will happen to your possessions after you die? Have you made a will?
Maybe you've got a will in place, but do you have any idea if your family will have to pay inheritance tax after you've gone?
The truth is that most of us don't give a second thought to our estate. It's not until later in life that we begin to think about our own mortality, and even then, most people in the UK don't have a will.
And we don't really come across inheritance tax until we lose someone in our family and maybe have to pay it ourselves.
In fact, 30% of people don't even start planning until they reach 55. Many wait until they have retired before considering writing a will.
But the earlier you get started, the more time you have to put provisions in place. If you plan correctly within your lifetime, you could save your family from a hefty bill after you've gone.
So, what is inheritance tax?
Inheritance tax is a duty that is levied when someone passes away. The amount due is calculated based on the estate's value when they die. Suppose the value of your estate exceeds the threshold, which is currently frozen at £325,000 until April 2026. In that case, your family will have to pay taxes to the Government when you die. It's a little jarring, considering the deceased person had already paid taxes when they earned that money in the first place.
But, inheritance tax is often nicknamed the 'voluntary tax'.
By planning ahead, you could possibly keep the value of your estate below the threshold, meaning that the tax won't become due.
The vast majority of people in the UK will not have to worry too much as they will not have an estate that exceeds the threshold of £325,000.
But property values increase, and inflation is currently up to record highs, so the value of your estate is constantly changing.
A bit of planning and professional advice could prevent a tax bill for your family. But if you don't plan ahead, your family could pay 40% tax on anything over the threshold.
So, what can be done to either remove or reduce this tax liability?
Firstly, inheritance planning is an entirely legal practice, not tax avoidance, simply forward-thinking and preparation.
And, crucially, this article is in no way tax advice. You should absolutely take the advice of a professional here to ensure that you have made the most available allowances based on your own circumstances.
Briefly speaking, most people's main asset of value is their home.
A spousal allowance means if you leave your property to your spouse, its value isn't included in the overall calculation. However, if you leave your property to someone else in your will, the property's value is then included in the estate valuation.
It's also possible to gift small amounts of cash to family members and friends each year without any inheritance tax implications. Charitable donations are also exempt from the estate valuation. So, in the later years of your life, you can 'spend' some cash in your savings by way of gifts to keep the balance down.
There are also slightly higher amounts allowed to relatives to pay for weddings and higher education.
You could also look into putting property and other assets into a trust if that would work for you.
There is a magic number when thinking about estate planning... 7.
To discount the gifted amount from the calculations, you must survive for 7 years after the gift has been given. If you were to pass away within 7 years, that amount would still be included in the calculations.
If you gifted your property to someone, it would only be discounted if you lived for 7 years after the transfer was made. You could still continue to live in the property after transferring it into someone else's name. But, you have to pay rent to your new 'landlord' at the going market rate. I'm sure that not everyone wants to become a tenant in their old age. But you'd certainly reduce the overall value of your estate by gifting your property and paying rent!
Just to reiterate, this is absolutely NOT tax advice.
It's a vast and complex topic and impossible to cover in-depth in an 800-word article. You should absolutely seek professional guidance. However, it could pay dividends for your family after you have passed if you put in a bit of thought before you go.
If you are concerned that your estate value could be close to the threshold and need to know how much your property is worth to plan ahead, contact our property experts. They will happily provide a property valuation so that you can plan accordingly.