How can we keep our Inheritance Tax down?
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I’m married with two adult children who have children of their own. Our house plus various savings and investments are already worth over £1 million and I would expect our portfolio to keep building up over time, so I anticipate our estate will be quite large when we die. Can you help us plan to keep our Inheritance Tax down, please?
Matthew Beck of Smith & Pinching responds:
The good news is that you could be entitled to a significant amount of Inheritance Tax (IHT) exemption under the current rules.
Firstly, you each have an individual IHT exemption of £325,000, known as the Nil Rate Band (NRB). There is no IHT payable on anything you leave to a spouse or civil partner (but not if you are co-habiting). Importantly, any unused NRB can be passed to your spouse, giving him or her a total combined NRB of £650,00.
In addition to the NRB, there is a further IHT exemption that can be applied if you leave the value of your home to your direct descendants – so children, grandchildren, step-children and adopted or fostered children. This exemption – known as the Residence Nil Rate Band or RNRB – depends on the value of your share of your home up to a maximum, which is currently £175,000. Once again, any unused RNRB can be passed to the surviving spouse/civil partner. This means that the surviving partner can have a combined exemption of up to £1 million.
However, the RNRB is reduced for those with larger estates worth over £2 million, with it being cancelled out (under current rules) if your estate is worth more than £2.7 million if the surviving partner uses the full combined NRB and RNRB.
Given the size of your current wealth, planning to mitigate IHT will certainly help. There are a number of measures, including gifts and certain trusts, that allow you to reduce the size of your future estate.
Financial advisers use lifetime cashflow planning to help with managing future IHT liabilities. It allows us to look at what your estate might be worth at different stages given different rates of growth in your investments and property, and to see the effect of a number of different measures on that value. It puts real figures into the discussion, which is hugely helpful.
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I strongly recommend that you speak with an independent financial adviser from a firm of Chartered Financial Planners to get advice. There are certainly ways to manage your future IHT liabilities – and the sooner you start to plan for this the better.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.
For more information, please visit www.smith-pinching.co.uk