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It is important to remember that you don't
have to be a millionaire or even slightly be rich for your
estate to be eligible for Inheritance Tax. Currently IHT
is levied on everything you leave over £300,000 for
this tax year and this includes
- your home and car
- your furniture and personal effects
- your investments and savings
- the proceeds of your life insurance (unless under trust)
Most people nowadays are therefore liable for this tax unless they plan positively, and quite legally, to defer or avoid this responsibility.
The rate of Inheritance Tax is 40% 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 value of the estate on death - so inheritance tax is relevant whether you stand to gain an inheritance or you plan to leave one.
Also, the problem is magnified as we are now in the period where the first batch of home owning citizens are leaving this mortal coil and passing the value of the house plus all the other items to the children.
If you Inherit
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.
With many people now spending as long in retirement as they do in their working lives, it's wise to add a substantial sum to your pension. Especially when you consider that the State Pension is currently only worth 15% of an average person's wage and is forecast to drop to 8% in the next two years. By making a one-off lump sum payment into your pension fund you can make a big difference to the quality of your retirement - and, of course, it is tax efficient.
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.
Leaving an Inheritance
First, it is important to decide to whom you may be leaving an inheritance.
Without some careful planning, the amount you leave might be a lot less than you think because the taxman might want the beneficiaries to pay Inheritance Tax.
In addition, the Government's ongoing review of the fairness of the tax system is likely to affect any inheritance planning, so you should think about making some plans right away.
Wills
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, 70% of the UK population do not have a 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 without you having any say in the matter so the relation that you loathe gets a proportion of your money, and there is usually a big fight.
Worse still, if you haven't any family or beneficiaries, it goes straight to the Crown - yes, the state grabs it all.
Another drawback of dying intestate is the fact that the law does not recognise unmarried partners, friends or charities.
All this heartache and the inevitable delays can be avoided if you make a will.
We will be able to help advise you on the content of your will, or alternatively recommend the services of a local solicitor. At a cost of around £100 it could save your family a fortune and a great deal of worry.
Inheritance Tax Planning
There are a number of ways we can help you to reduce or indeed negate any possible Inheritance Tax.
You could, for instance, 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 £300,000 free of inheritance
tax to them in your will and gifts between married couples
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. Trusts can be complicated and we will set this up fir you, if necessary, working in conjunction with your solicitor.
Another option you might like to consider is setting up an insurance policy to pay the tax bill after you die. We can compare all insurers and find you just the right policy.
How is an Estate Distributed?
The spouse will benefit only if he or she survives the intestate partner by 28 days. Where the spouse does not survive, the intestate estate will be dealt with as if there had been no spouse.
Some ideas you might like to consider having checked the current level of the Nil Rate Band below which tax is not payable.
- Making grandchildren the main beneficiaries Using foreign property
- Giving your house to your children but remain living in the property
- Gifting personal effects
- Using the nil-charge on inheritances by a spouse
- Setting up gifts within the 7-year period prior to death regulation
- Setting up a family trust
- Discuss how much you can give away each year free of inheritance tax liability
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