MONEY MATTERS: Inheritance tax changes

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You may have heard that the Government is looking at ways to simplify the complexities of Inheritance Tax.

Inheritance Tax was introduced in 1986, replacing Capital Transfer Tax. The current nil rate band per individual of £325,000 has been frozen at that level for the past 13 years.

The Finance Act of 2016 introduced an additional home allowance – the Residence Nil Rate Band. This currently sits at an additional £150,000 per individual, and next year it will increase to £175,000. However, you only qualify if you leave your home to your children.

The legislation for the Residence Nil Rate Band is exceptionally complex.

A lot of people are under the impression that they each are entitled to a combined exemption of £1 million. That’s incorrect.

Most married couples wish to ensure that when one of them dies, the other can continue to live in the family home. If so, how are you going to claim for the additional home allowance?

The solution is to draft a Will with specific wording that will enable your partner to live on in the family home, but ensures the additional £140,000 can still be claimed tax free by the children when your partner dies.

Drafting your Will to encompass the above planning is not cheap, so many people opt to brush it under the rug. But let’s have a look at the numbers.

Most of the families that we advise have estates of over £2 million. Current legislation means that for every £2 you have above the £2 million of home allowance, you lose £1.

In other words, if your joint estate is worth £2,700,000, you will lose all of the benefits of the additional nil rate bands. 

That means you will lose £140,000 in tax-free inheritance for your children.

I can guarantee that our planning fees are a lot less than that! If you want to make sure your children get the most out of your hard-earned estate, this forward planning is an investment worth considering.

But what about gifting away assets whilst you’re still alive to avoid Inheritance Tax?

The bank of Mum and Dad has the sixth-highest lending of all banks but ranks highest for misery, despair and financial hardship when things go wrong.

The best advice I can give you is to keep emotion out of the equation.

Here’s the point: once you make a gift, you cannot change your mind.

You gift £100,000 to your son? If he divorces, half of that money may be lost forever. And if you find that you desperately need the money you gifted, you may well find yourself high and dry.

If you wish to gift money, try to use the annual gifting allowances of £3,000 per individual as far as possible.

You can double up in your first year of gifting.

Whatever your plans are, keep accurate records. Remember, at some point in the future, someone (quite possibly one of your children), will have to account to HMRC for all deductions from Inheritance Tax. You won’t be there to guide them.

Now is the time to act to make sure your Will is watertight and that when it comes to it, your beneficiaries will do just that – benefit – rather than see your precious estate chomped up by tax and regulations.

If your estate is valuable and you want to pass it onto your children intact, please book a Discovery Meeting with Ruth by phoning 0118 934 7920, and she will reserve you a free copy of my book Inheritance Tax Simplified.

Wills Tax & Trusts

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