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INHERITANCE TAX
On death, the government assesses how much your estate is worth;
(and this includes cash you may have in the bank, any
investments, property, businesses, or other assets that you own.
If the total value exceeds the Inheritance Tax threshold set by
the Chancellor, tax will be payable on any excess at the rate of
40%.
From April 2012 this amount has been reduced to 36% if you leave
at least 10% to a registered charity.
It is clear that talking about inheritance issues can be awkward
(particularly if it involves yourself!) but ignoring this
subject can easily become the most expensive mistake you will
ever make in your financial life (and beyond).
The only mitigating factor in adopting the ‘head-in-the-sand’
approach is of course that you will not personally witness the
transfer of often very large sums from your estate (and your
beneficiaries) into the tax-mans coffers,
CURRENT
LIMITS – The NIL RATE BAND
Everyone is allowed to leave up to a certain amount before their
estate becomes taxable. The amount is set by the government and
is generally referred to as the Nil-Rate Band (NRB; i.e.
the amount you pay a ‘nil-rate’ of Inheritance Tax on).
Currently (2012/2013 tax year) you are able to leave £325,000
completely tax-free to your heirs.
Above that amount, anything you leave behind is subject tax of
40% (36% if you leave at least 10% to a charity).
So for example, if you leave behind assets worth £500,000, your
estate pays nothing on the first £325k, and 40% on the remaining
£175k – a total of £70,000 in tax - if not leaving to charity.
Previously, the nil-rate threshold changed every year. However,
in the 2010 budget, it was announced that the rate will be
frozen for four years, effectively decreasing it in real terms
(i.e. when inflation is factored in).
Transferable NIL
RATE BAND
It is important to note that changes to the Inheritance Tax
rules in 2007 led to the introduction of the so-called:
transferable Nil Rate Band (NRB) for married couples and civil
partners.
This means that when the first partner dies, any unused NRB can
be transferred to the surviving partner. Married couples can
therefore now have £650,000 of assets before IHT at
40% becomes a potential problem.
The transferable NRB rule has resulted in far fewer estates
being liable for IHT, but the fact remains that if your assets,
including your house, are worth more than the NRB, your estate
is likely to be taxed when you die - unless you have taken
assertive remedial action beforehand.
It's important to remember that IHT is never a problem for the
person who has passed away: it's the beneficiaries whose
inheritance will be hit by tax and who will have to sort out any
complications.
Having said that, most people would prefer when they die that
their wealth helped to boost the coffers of their family and
close friends rather than HM Revenue & Customs. So what can be
done to keep your assets beyond the taxman's reach?
As Benjamin Franklin so rightly said, the only things that are
certain in life are death and taxes. So, whether you stand to
inherit or leave the money, the first thing which is important
is to face the facts and tackle these issues in a rational and
grown-up manner.
On the following pages NFA provides you with selected tips which
can be used to mitigate, or even remove, any future Inheritance
Tax bills.
The described approaches do vary in a number of respects and the
choice of the best way forward will often depend on the size of
your total assets as well as other factors (age, health, family
circumstances, attitude to risk, life style etc.) but for
simplicity the various scenarios have been divided into three
categories:
IF YOU HAVE ASSETS JUST EXCEEDING THE NIL
RATE BAND
(>£325,000)
►►►
WEALTHIER INDIVIDUALS
(£400,000-£1,000,000)
►►►
HIGH/ULTRA HIGH NET
WORTH INDIVIDUALS
(£1,000,000+)
►►►
Follow the links above to get further details of the
approaches most suited to each asset category.
As the IHT-field can be very complex and large sums of money
often are at stake, it is important that you seek proper
professional advice unless you are absolutely sure about what
you are doing.
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