Inheritance Tax and How It Could Affect You
No doubt you will want to leave a legacy for your family and loved ones, but are you aware you might be liable for Inheritance Tax? Even if you believe you will not be liable, it is always best to check the situation. After all, it could be potentially devastating for your loved ones if later on it was found you are liable for IHT.
Of course, like many, you may be waiting for the new reforms to come into force in April 2017 before checking whether IHT is likely to affect you, but this could well be a mistake. Despite the new rules there is very likely to be a dramatic increase in the number of families hit by death duties according to forecasts by the Office for Budget Responsibility (OBR).
So what is Inheritance Tax (IHT)?
If the value of your estate is bigger than what is known as exceeding the current nil rate band your family face the prospect of being left with a 40% IHT demand on the amount exceeding the threshold on your death. The nil rate depends on your circumstances; if you are single it is currently £325,000 and £650,000 if married or widowed.
IHT does not apply only to your property; everything you own including vehicle, savings, investments, jewellery and furniture is factored into the total, though any liabilities are subtracted.
What the new rules will entail
The rules introduced from April 2017 will see the introduction of a ‘main residence’ nil rate band gradually introduced to the existing threshold. By 2020 this will have increased to £175,000 per individual.
Despite the new rules there may still be various factors which will not protect you from IHT.
How the changes to the legislation could affect you
Currently there are potential options available for reducing or eliminating your liability for IHT. But any changes to the legislation could see these disappear.
So what options are currently available to you?
· Holding back on starting the seven year clock for IHT
Any gift you make to a beneficiary becomes exempt from IHT after seven years. However, If you don’t survive the seven years, gifts made would likely be classed as part of your estate when calculating your IHT liability.
· Utilising your annual gift allowance of £3,000 each year
Currently you can make use of a number of gift exemptions that can help reduce your IHT liability. You can give away £3,000, exempt from IHT, in any one tax year through your Annual Gift Allowance. Any previously unused allowance can be carried over from one year to another. This means you could gift £6,000 at the start.
If taking advantage of your gift allowance is the route you wish to take it is best to start as soon as possible to maximise the number of gifts you make before your eventual death. However, you should be aware that if you die prior to addressing your IHT liability, your loved ones could be left with a bill. The bill must be paid within six months or interest would be charged. Usually they would have to settle the bill before being allowed to inherit your estate.
Fortunately they are also options available to help you protect your family’s future
We can help you determine whether you are potentially liable for Inheritance Tax. If that is the case we can assist in devising a plan to prevent the inheritance intended for your family and loved ones ending up with the tax man.
For more information and to enable us to assist you please contact us.