Inheritance Tax

What exactly is Inheritance Tax?

Let’s dispel a myth right here and now. You don’t have to be rich for your estate to be subject to Inheritance Tax. Currently it’s levied on everything you leave over £325,000 (20011/2012) and includes:

• your investments and savings
• your home and car
• your furniture and personal effects
• the proceeds of your life insurance, unless it is written in trust.

The rate of Inheritance Tax is 50% for everyone. This is equivalent to the highest current rate for income tax. The tax is paid by those that inherit – and is deducted from the estate on death – so Inheritance Tax is relevant whether you stand to gain an inheritance or you plan to leave one.

Gaining an inheritance

1 in 40 people in the UK inherit an average of £17,500 each year. The total after tax is £31 billion.

The average estate leaves £90,000 net of tax and the average amount received by each individual is £17,500, suggesting that, on average, people share out their bequests between five people. Some 10 per cent of beneficiaries receive £50,000 or more. A further 30 per cent receive £10,000 or more, enough to make a down-payment on a home or pay off a sizeable chunk of a mortgage.

However big or small your inheritance, there are a number of ways to put your money to good use. The ideal way, of course, is to invest at least some of it so it grows into a more substantial sum.
Source: International Longevity Centre UK

Top up your pension with your inheritance

With many people now spending as long in retirement as they do in their working lives, it’s wise to add to your pension. Especially when you consider that the state pension is currently only £102.15 a week for a single person and £163.35 for a couple (2011/2012). By making a one-off lump sum payment into your pension fund you can make a big difference to the quality of your retirement.

Invest it for the future

Another way to invest your inheritance is to place it in an Individual Savings Account (ISA). These are tax-free in the hands of an investor, and could be an ideal way to help save for a rainy day or to give you a more comfortable retirement. Other options to consider include Friendly Society accounts and National Savings and Investments.

Writing a will

For a lot of people, making a will is the most obvious way to plan for the future and the fairest way to provide for loved ones.

Yet, it’s a fact that an amazing 76% of the UK population do not have an up to date will*. Dying without leaving a will is called “dying intestate” – which means that all your “wealth” is divided up between each surviving member of your family. If you haven’t any family or beneficiaries, it goes straight to the Crown.

Another drawback of intestacy is the fact that it doesn’t recognise unmarried partners, friends or charities and such like. All this heartache – and the inevitable delays – can be avoided if you make a will.

Inheritance Tax planning

There are a number of ways to reduce any possible Inheritance Tax.

For example, you can make gifts now to intended beneficiaries as these gifts are free of Inheritance Tax, providing you live for 7 years or more following the gifts. There are several other tax-efficient ways of making annual gifts, both to individuals and organisations such as charities.

You could then leave a further £325,000 free of Inheritance Tax to them in your will. Gifts between married couples incidentally are not subject to any Inheritance Tax. You might like to think about setting up a trust. If you put part of your estate into a trust for your grandchildren, it could be decades before your cash is again under the eye of the taxman.

Another option you might like to consider is an insurance policy to pay the tax bill after you die.

This summary represents Huggins Financial Planning’s understanding of the law in England and Wales in April 2011.  It does not constitute legal advice and Huggins Financial Planning cannot accept any legal responsibility for it. In Scotland the law is different.

* Source: "The Telegraph”