According to a recent survey by Baring Asset Management, 17% of Britons are relying on inheritance to help fund their retirement, with just 44% believing that pensions alone are sufficient to get by.
That figure rises for people in the A/B social segment (upper and middle classes), with nearly one in four saying inherited assets form a key part of their retirement planning, up from 20% in 2011.
However, if you’re relying on inherited funds or assets, or if you’re planning to help out relatives, dependents or friends by leaving them something in your Will, there is one barrier to overcome: Inheritance Tax.
What is Inheritance Tax?
It’s a 40% tax on the value of your estate – property, assets, money etc., minus liabilities – when you die. Unless you plan ahead, it can severely deplete the amount you leave to people.
However, if you’re aware of the rules and exemptions of Inheritance Tax when you’re making your Will and managing your assets, you can limit the amount you pay out; in fact, if you’re very canny, you can leave almost everything to dependents without them having to share with the taxman.
How can I avoid paying the full amount?
There are ways to leave assets to people without paying Inheritance Tax or by paying a reduced sum. These include:
• Gifts to partners If you ‘gift’ an asset to your spouse or registered civil partner, it’s tax free, unless they live outside the UK (if that’s the case, you’ll need to seek professional advice).
• Donations Anything you gift to a qualifying charity or UK national body (like a political party) is tax free. To check whether an organisation qualifies for this, call the HMRC helpline on 0845 30 20 900.
• Allowance You can give away assets up to a certain amount without paying tax – this is known as your ‘tax-free allowance’. The current allowed value, called the ‘nil band rate’, is £325,000; it’s reviewed each year, so check the HMRC website www.hmrc.gov.uk for the latest figure. The allowance is calculated AFTER you’ve given gifts and donations and after certain things have been deducted, such as burial expenses and mortgages. Note that if you ‘gift’ something during the seven years before you die that reduces the value of your estate (e.g. if you transfer money to someone), it can affect the amount of your tax-free allowance after your death.
Are there any exemptions?
There are certain ‘allowable exemptions’ to be aware of when you’re gifting assets – this gives you other ways to leave things to people without paying Inheritance Tax on them. They include:
• Small gifts Anything worth £250 or less in any one tax year given on a ‘festive’ occasion, like a birthday or Christmas.
• Annual exemption Anything you give worth £3,000 or less in any one tax year – either one gift or several small ones not covered by the ‘small gifts’ exemption. If you give gifts worth less than £3,000, you can carry over the surplus to the next year (but no further).
• Made out of income Gifts you give that are part of your normal expenditure – i.e. gifts you would usually give, paid for by your income and leaving you more than enough in your bank account to maintain your usual standard of living. Again, these can’t exceed £3,000.
• Marriage/civil partnership Gifts you give to one or both of the happy couple on or shortly before their big day are exempt up to a certain point; that varies depending on your relationship with them, so check the HMRC website www.hmrc.gov.uk or talk to an expert.
Where there’s a Will, there’s a way
The best way to navigate the tricky Inheritance Tax waters is through an effective Will – visit our ‘Wills and probate centre’ to find out more.
This will also give you a chance to think about how you’re organising your estate, for example which assets you want to be covered by certain tax exemptions, if you need to co-ordinate with your partner on bequests and if you want to place some of your assets into a trust.
The sooner you start this process, the better, and you should update your Will regularly, particularly if you have any big changes in your life, such as buying or selling a property.
If you have any further questions, contact our team.