Wealth Management & Inheritance: A smart way to manage inheritance tax

Smart wealth management is all about making sure your money is well looked after while you’re around to use it. But what about after you’re gone—how do you make sure your accumulated assets don’t leave a legacy of pain for those you leave behind?

It’s an emotional topic and one that a lot of people don’t like to think about. However, it’s fast becoming something we all need to consider. Because what was once a concern only for those with a high level of wealth now affects more families than ever before, costing them thousands to settle bills before they can inherit what’s been passed on.

So how can you mitigate this issue?

Inheritance tax in a nutshell

Your combined wealth is made up of everything you own—cars, property, jewellery, savings and investments, etc. —minus any debt. This is known as your ‘estate’. When you pass away, your estate is valued. We each have a tax-free inheritance threshold of £325,000 and so anything under this won’t be taxed. Similarly, those who are married (or widowed) get a combined threshold of £650,000. However, if the valuation comes over the threshold, a 40pc tax applies to everything over that limit. This is known as inheritance tax.

NB: The Financial Conduct Authority does not regulate Inheritance Tax planning or Trusts.

Why is it affecting more people than ever before?

Earlier this year the Office for National Statistics forecast that £4.6 billion will be raised through inheritance tax for 2015/2016, which is double the £2.3 billion raised only six years ago during 2009/10. This is obviously great news for the government, but not so much for many families around the UK.

Reasons behind this dramatic increase are tied in with the economy, which in recent years has seen a remarkable recovery following the crash. While the tax-free threshold has remained fixed, rising wages means more chance to save, while a better housing market means increased investment opportunity and higher house prices. All of which has pushed people’s estates over the tax-free limit.

Ways to protect your legacy

There are many issues that could impact what your beneficiaries can inherit. However, there are also several ways to manage your wealth to ensure a smarter inheritance.

Marriage: You’ve already seen the impact that marriage can have, by doubling the threshold. This is also the same for same-sex marriage and civil partnerships. While it seems rather old fashioned in the face of the modern family, unmarried, cohabiting partners could face more risk and a potentially costlier (and emotionally draining) settlement—although making sure you have a will in place can help.

– Gifts: You can give away assets to your spouse to avoid paying inheritance tax. However, the regulations are complicated and it’s worth checking with an independent financial advisor first. You can also provide gifts to family or friends who are not your spouse or civil partner (e.g. your children), but again there’s a catch in that the value of the gift remains in your estate for 7 years—so if you die in that time it will still be liable for inheritance tax. You can, however, give away up to £3,000 a year, plus money to children and grandchildren for their weddings, without these gifts incurring inheritance tax.

– Life insurance: Having life insurance won’t reduce the amount of inheritance tax your family will have to pay on your estate, but the money could help them pay the bill. Just remember to make sure the payout is put into a trust, otherwise it will simply add to your estate worth and still be due for inheritance tax.

– Charity: Anything you leave to charity is exempt from inheritance tax. This means you can rest easy knowing that the cause benefits fully from the money you’ve left them. Plus, leaving 10% of your estate to charity means a reduction on the inheritance tax due on the remainder—from 40pc down to 36pc. Depending on how much the estate is worth, this might not be a huge saving, but it still increases the inheritance your family and friends receive, and helps a good cause too.

– Trusts: Putting your assets into a trust is another useful way of avoiding inheritance tax. As long as you, your spouse, or your children under 18 can’t benefit from it, these assets will no longer be seen as part of your estate. There is also some flexibility in when you set the trust up, as it can be done now or as part of your will. However, some might be liable for inheritance tax anyway and the rules around trusts can be complicated to understand if you want to avoid swapping one tax for another. So be sure to talk to an independent financial advisor for advice on the best option for you.

If you want to know more protecting your legacy and about putting a suitable inheritance tax plan in place, or any other private financial matters you might have, we can help. Get in touch today and speak to one of our experts.