The surge in demand for larger properties and the resulting increase in prices has led to a rise in the number of homes worth £1 million or more. As a result, certain individuals may now have an unexpected inheritance tax liability if their estate meets the relevant criteria.
According to Savills, 1 in every 40 homes is now valued at £1 million or more across Great Britain. Demand meant that around 40,000 properties crossed the £1 million threshold in 2022.
It is not surprising to learn that London has the highest percentage of properties valued at £1 million or more, with one in every 10.6 homes in the capital meeting this threshold. However, it is noteworthy that for the first time in at least 15 years, over 50% of the properties valued above £1 million are located outside of London. It is possible that property wealth has been overlooked when considering changes in personal wealth, given its limited accessibility. The steep rise in property prices highlights the need to consider Inheritance Tax (IHT) planning. Although there are typically measures that can be taken to minimize the potential inheritance tax liability it is crucial to take a proactive approach.
The threshold for paying Inheritance Tax is £325,000
IHT is a tax on your estate when you pass away. The standard IHT rate is 40%, so it could leave your loved ones with a significant bill.
An individual may become liable for IHT if the total value of their assets exceeds the nil-rate band, which stands at £325,000 for the 2023/24 tax year. If an individual leaves their primary residence to their children or grandchildren, they may be able to utilize the residence nil-rate band, which stands at £175,000 for the 2023/24 tax year.
It is possible to transfer any unused Inheritance Tax (IHT) allowances to one’s spouse or civil partner. This allows a couple to potentially pass on assets worth up to £1 million without incurring IHT liability.
Although the available allowances may appear substantial, surpassing them could be easier than expected, particularly when considering potential increases in asset values over an individual’s lifetime. According to Halifax, the average house price in the UK in February was more than £282,000. So, your home alone could use up a substantial proportion of your nil-rate band.
5 practical steps you can take to reduce a potential inheritance tax bill
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Write a will
It is essential to create a will regardless of Inheritance Tax (IHT) concerns, as it is the only means of ensuring that one’s assets are allocated in accordance with their desires.
In terms of IHT planning, drafting a will can aid in the utilization of available allowances. For instance, designating a child as the recipient of one’s primary residence may enhance the amount that can be passed on tax-efficiently, taking advantage of the residence nil-rate band.
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Gift some assets now
Transferring assets as gifts at present could potentially decrease the value of one’s estate below the Inheritance Tax (IHT) threshold or reduce the resulting tax bill. However, there are some important factors to consider when contemplating this option.
Firstly, it is crucial to speak with loved ones about the intended method of transferring wealth, as it may impact the amount they receive as an inheritance.
Secondly, it is essential to assess the potential impact on one’s long-term financial stability. Would there be enough income or savings to sustain one’s standard of living, even after gifting some assets? Would one be able to cope with any unexpected financial shocks?
Lastly, it is crucial to note that not all gifts are immediately excluded from the estate for IHT purposes. In some cases, gifts may be included in the calculation of IHT tax liability if the individual passes away within seven years of the transfer. Therefore, it is vital to understand the implications before proceeding. Please contact us to discuss your options if you intend to gift assets to reduce IHT.
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Take out life insurance
While life insurance does not lower the Inheritance Tax (IHT) liability, it can offer a way for loved ones to settle the bill. A life insurance policy can provide a lump sum payout to beneficiaries upon the individual’s death, provided that the premiums have been paid. The amount of coverage can be customized to suit the individual’s needs. The beneficiaries can then use this payout to settle the IHT bill, eliminating the need to sell or deplete other assets.
If an individual intends to take out life insurance specifically to cover an IHT bill, it is essential to establish a trust for the policy. Failure to do so could result in the insurance payout being considered part of the estate, potentially increasing the IHT liability.
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Leave some of your assets to charity
By leaving assets to a charity, you can reduce the amount of Inheritance Tax (IHT) you owe because such assets are not included in your estate for IHT purposes. Additionally, if you leave at least 10% of your estate to charity, you can lower the IHT rate you pay from 40% to 36%, potentially resulting in a lower overall tax bill. This way, you can make a positive impact on a worthy cause while simultaneously benefiting your financial situation.
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Arrange a meeting with us
Depending on your objectives and individual situation, there may be additional measures you can adopt to decrease your Inheritance Tax (IHT) liabilities. We can work together to establish a customized plan that suits your specific needs. Contact us to schedule a consultation.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The Financial Conduct Authority does not regulate tax planning, will writing, or estate planning.
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