Big changes in Inheritance Tax are looming - how can you best safeguard your estate?
Posted Sep 16, 2019.
There has been a lot of debate this summer amongst will writing and estate planning professionals following the publication of a report by the Office of Tax Simplification (‘OTS’ for short) that recommends significant changes should be made to the UK’s inheritance tax laws. The report makes it clear that the current rules are too complex, are outdated and consequently they have made a number of recommendations as to how they need to be changed.
When inheritance tax was first introduced in its current form 1986, the amounts of money and asset values it covered meant that only a comparatively few, wealthy individuals were affected. A lot has changed in the past 30 years, in particular the boom in house prices which mean that more and more ‘ordinary’ people now have to accept that they will lose some of their estate value to the tax man when they pass away.
Four ways you can minimise your Inheritance Tax liabilities
No one likes paying more tax than they have to, especially as most of us have worked hard over many years to acquire the assets that we own. Here a four ways that you can currently safeguard your assets from inheritance tax:
· Use your £3,000 Annual Gift Allowance – this is a tax exemption that allows you to give away, as a gift, up to £3,000 every year, tax-free. This can be made up of money or property, and should you die immediately after making the gift, there is still no tax to pay. Many experts think that the £3,000 should be increased – if the amount had kept track with inflation, the amount should be nearer £12,000. The OTS has recommended merging this allowance with the marriage exemption to create an overall personal gifts allowance. There is also a marriage exemption which means that parents to each give up to £5,000 each to couples ahead of their wedding free of inheritance-tax. In addition, grandparents and great grandparents can gift the couple £2,500 each and other relatives or friends can gift £1,000 – again, all free of inheritance tax.
· Transferring your Pension – you should check to see if you have a pension pot that can be transferred to beneficiaries upon your death. A pension pot isn’t included in your estate’s overall value, so is not subject to inheritance tax. A lot depends on the type of pension you have and your age when you die. If you die before age 75 and have a defined contribution pension that you haven’t used, your family should be able to claim the entire pot tax-free within two years. If you die after you turn 75, beneficiaries will be liable to pay income tax on the pension amount.
If you have already started drawing down on your pension pot and die before 75, your beneficiaries can get a lump sum or drawdown payments without paying tax. If you are 75 or older when you die, they will again need to pay income tax. If you have a final salary pension and die before 75, your beneficiaries typically receive a fixed lump sum tax-free. Again, if you are over 75 when you die, beneficiaries will need to pay income tax. One thing to be aware of is making a pension transfer to another person within 2 years of death – HMRC may well consider this as tax avoidance and a tax bill may be payable.
· The Seven Year Rule - under the current tax rules, if you make a gift of money, assets or property and live for over seven years after making the gift, then there is no tax for the beneficiary to pay. This law was introduced to encourage distribution of an individual’s wealth during their lifetime. It is also a good way of reducing your overall estate value upon your death, therefore reducing the amount of inheritance tax that your beneficiaries may be liable to pay. It’s worth remembering that even if a beneficiary has received such a gift and has spent the money, should you die within seven years they will still be liable to pay tax. One of the OTS report recommendations is to reduce the seven year window to five years.
· Transferring Additional Income – you can also pass on other sources of income such as a salary, dividends, pension payments, etc, on a tax-free (to the beneficiary) basis as long as such payments are regular and not a lump-sum. This is an under-used exemption, with less than 600 estates making use of it during the 2015/16 tax year.
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