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The best way to minimise inheritance tax risk

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How can I minimise the amount of inheritance tax my family may have to pay when I die? How much am I allowed to give away in my lifetime?

These are common questions often asked when clients are thinking about inheritance tax planning. How do you feel about inheritance tax – do you think it is fair or unfair or just about right?

Inheritance tax revenues have increased substantially over the last decade and hit £5.2 billion for 2019/20 tax year, the most recent official figures.

[Source Table 12.1 inheritance tax: analysis of receipts’, HMRC, July 2020].

It is those that are left behind who are responsible for organising payment of the inheritance tax bill. Paying the tax can be problematic if the assets left to beneficiaries are not cash, but instead, property and the inheritance tax has to be paid on it. Paying inheritance tax on the property’s value could mean the family needs to raise the cash to pay the tax bill or sell the property, which is not ideal if the desire is to keep it in the family.

Many feel inheritance tax is an unfair tax as they have paid taxes all their lives, and they are taxed on their estate above the Nil Rate Band on death. Inheritance tax is a voluntary tax; you don’t have to pay it if you carry out sensible planning. In my experience, I find clients in one of three categories:

-Those who feel they have enjoyed their wealth and been able to pass enough down to their families in their lifetime so those left behind can pay any taxes due.

-Those who utterly hate the thought of leaving money to the taxman and will do everything they can to avoid it.

-Those who want to sensibly plan to mitigate it, realising any actions they take need to make sure they don’t run out of money in their lifetime, especially if they need to fund care in their later years. These clients find the right balance between sensible planning and keeping control over their financial situation.

A Guide to Passing on Wealth

To help you understand your inheritance tax liability, we have published A Guide to Passing on Wealth which includes a simple inheritance tax calculation sheet. This free-to-download guide outlines a range of options to consider covering wills, rules of intestacy and inheritance tax, as well as the use of gifts, trusts, pensions and business relief to make sure loved ones reap the benefits of your hard work.

The example inheritance tax calculation within this guide offers a simple way for individuals to work out their approximate inheritance tax bill.

The rules around inheritance were left unchanged in the 2021 budget. However, the Nil Rate Band and the Residence Nil Rate Band are now frozen at £325,000 and £175,000, respectively, until 5th April 2028. The freezing of tax bands can often push people who may not have expected to pay anything in inheritance tax into the taxman’s net. It is difficult to gauge if inheritance tax will be reduced or even abolished altogether in the future. I feel we need to recover from the pandemic, and tax is an effective way of raising monies, so I am not confident it will reduce.

Inheritance tax can be a complex area of tax planning, especially if you have assets exceeding that nil-rate band threshold or various assets across things like property, investments, businesses, etc.

Please do take a look at my free guide and let me know if you have any questions about your inheritance tax planning.

The information contained in this blog post does not constitute advice or recommendations. You should seek independent financial advice before acting on any information on this website.

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For clients that do not require formal advice but need some time to discuss a situation or receive some guidance I offer my time via a 30-minute call for £75 or a 60-minute call for £175.

The cost of the call is payable at the time of booking.  Many clients have said these calls are useful to have time to discuss their situations and be guided to other services or other professionals for legal advice or care provision because not all clients need formal financial advice but they appreciate a professional to discuss their situation with.