Estate planning: The tax implications

December 14th, 2018

Planning what will happen to your possessions and savings once you’re no longer here is something that many of us put off. And this is backed up by research from YouGov, which suggests that 62% of adults in the UK are running the risk of dying intestate, meaning they’ve no will in place.

Estate planning is essential if you want peace of mind for you and your loved ones, and by writing a will you can ensure that your assets are distributed according to your wishes.

As well as ensuring you have a legally valid will, you should also consider the tax implications when planning your estate. Inheritance Tax (IHT) could cost your family thousands of pounds, but with effective tax-planning, you can significantly reduce how much your beneficiaries will have to hand over to HMRC upon your death.

Your IHT threshold

Everyone in the UK is given a nil rate band of £325,000, with anything above the threshold subject to Inheritance Tax at a rate of 40%. There is also an additional threshold of £125,000 (£150,000 from 2019/20), which is added to your nil rate band if you leave your residential home to your children or grandchildren.

It’s also worth noting that married couples or those in a civil partnership can receive their partner’s unused threshold, meaning that your total tax-free threshold could be as much as £900,000.

Making gifts

If you know your estate will exceed your IHT threshold, you may want to make gifts as a way of reducing the value of your estate. However, some gifts may still count towards the value of your estate for IHT purposes, unless you live for another seven years after the gift has been made. If you pass away within the seven years, the gift could be taxed, but the IHT rate is tapered depending on when the gift was made.

Some gifts remain exempt from IHT. For example, if you make small gifts such as birthday or wedding presents from your normal income, the value of these gifts won’t count towards your estate, even if you die within seven years. You are allowed to give away up to £3,000 per tax year in gifts without them being added to your estate. You can also make gifts freely to your spouse or civil partner.

As part of your will, you may want to gift to charity. This in turn could reduce your IHT liability, as you will qualify for a reduced rate of 36% on some assets if you leave 10% or more of the net value of your estate to charitable causes.

Succession planning

As well as ensuring your personal affairs are in order, as a business owner, it’s essential to make considerations for the future of your business. If you want to pass on a business or shares in your business, then Business Property Relief can provide up to 100% of tax relief on the transfer of business assets, depending on the type of asset.

Due to the complexities of Inheritance Tax, we always recommend you speak to an adviser before making gifts as part of your estate. Give Champion a call today by contacting your local office.

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