Estate planning isn’t easy. Managing a potential Inheritance Tax (IHT) liability while trying to enjoy your retirement in the present can be tough.
2021 saw several announcements that could make your job that much harder over the next few years.
The scale of the government’s coronavirus borrowing has been well documented. Last year, the Conservative party started to look at ways to claw back some of that overspend.
Numerous threshold freezes – amounting to “stealth taxes” – were joined by a brand new Health and Social Care Levy. The suspension of the State Pension triple lock also left pensioners out of pocket.
Here’s a look at some of the main changes that could affect how you plan your estate in the years to come.
The thresholds for determining your IHT liability are frozen until at least 2026
The chancellor, Rishi Sunak, used his Spring Budget to announce a freeze to the threshold above which IHT is payable.
This threshold, known as the “nil-rate band (NRB)”, will remain at its current rate of £325,000 until at least 2026. When the value of your estate is calculated on death, assets above this limit will be liable for tax at 40%.
As a homeowner, you also receive a further threshold that applies, in certain circumstances, when you pass on your home. The “residence nil-rate band (RNRB)” stands at £175,000, effectively increasing your tax-free threshold to £500,000.
It applies when you pass on your property to your direct descendants (such as children, grandchildren, and step-children). The RNRB has also been frozen until 2026.
Freezing IHT thresholds will raise almost £1 billion for the Treasury
Introduced as part of the chancellor’s plans to recoup the government’s coronavirus overspend, the freeze could hit your estate in the next four years, as house prices and investment values rise.
The government’s budget report confirms that the freeze is expected to raise £985 million for the Treasury.
Thankfully, there are several ways to lower the value of your estate for IHT purposes, if you think you could face a liability on death.
3 ways to lower the value of your estate
1. Gifting to family
HMRC gifting rules allow you to pass on wealth during your lifetime tax-free in some circumstances. Each tax year, you can gift £3,000 using your “annual exemption”. Up to this amount, the gifts you make will not form part of your estate for IHT purposes.
The £3,000 applies per individual and any unused exemption can be carried forward for one year. If neither you nor your partner used your exemption last year, you could gift £12,000 this tax year, removing that amount from the value of your estate.
You might also consider making regular gifts to loved ones using the regular expenditure out of income exemption. You’ll need to prove to HMRC that the gifts are out of your normal income and that making the gift doesn’t affect your standard of living.
2. Leaving a charitable legacy
Charity gifts are usually tax-free and a charitable legacy in your will is a great way to give to a cause you care about. You can leave a specific sum or item, or give a percentage of your estate once all other bequests have been made.
Not only will the gifted amount be removed from your estate for IHT purposes, but if you donate 10% of your estate net value to charity, the rate of IHT payable falls from 40% to 36%.
3. Placing money in trust
A trust is a great way of keeping control over who receives your money, property, or other assets, and when. You appoint a trustee to look after the trust and they will ensure that your chosen beneficiary receives their inheritance at a time of your choosing.
This could prevent a child from accessing the money until they reached the age of 18, or even stipulate how it should be spent. A trust means that only the beneficiary can receive the funds, which ensures that your wishes are carried out.
Trusts are a great way to safeguard your wealth but they can be complex. Speak to us if you’re thinking of putting a trust in place and we can help ensure it is right for you.
Get in touch
If you’d like advice on managing your estate, or any aspect of your financial plans, please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779.
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Please note:
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
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