Inheritance tax can be a major burden on your children or other beneficiaries if it is not well managed. Unfortunately, it can be difficult to predict exactly what will happen, but good planning can help to mitigate any risks.
An estate can be inherited by civil partners or spouses tax free, but other friends and family member may need to pay tax.
Spouses and civil partners benefit from the unused allowance of their partner, but for other beneficiaries, a 40% inheritance tax charge kicks in over £325,000 (£450,000 if a home is being given away to children and grandchildren).
Giving money away while you're still alive is one solution to the issue. The gift will then be free of inheritance tax as long as you live for seven years after the gift is made. In addition a £3,000 annual gift allowance payment can be made to beneficiaries free of inheritance tax.
The nil rate band of £325,000 is used up in the seven years prior to death before the rest of the estate.
A tiered structure that depends on when you die applies if you have used your nil rate band of £325,000 and give gifts above this allowance, and then die within seven years of the gifts.
If your estate, and any gifting, adds up to less than £325,000 and you have gifted within the seven years, there will be no inheritance tax due and the taper does not apply.
A 40% tax will be due on an estate that goes over the threshold.
If you make a gift, it is classified as a PET (potentially exempt transfer), however, it only retains this status if you survive for seven years after the gift. Otherwise the PET becomes "failed".
There are other gift categories available on top of the annual allowance including wedding gifts for children at £5,000, £2,500 for grandchildren or £1,000 for others. Keeping detailed records of any gift is extremely important.
Inheritance tax is an area in which early preparation can make a big difference to the final result. Your financial adviser can ensure you mitigate the burden on the next generation as much as possible.
Information is based on our current understanding of taxation legislation and regulations which is subject to change.