Inheriting a problemPosted by Matt Higham
Matt Higham examines Inheritance Tax Threshold (nil rate band) and its impact on your estate.
In his recent Autumn Statement, Chancellor George Osborne announced that the current freeze on the Inheritance tax threshold (otherwise known as the nil rate band) would be raised in 2014/15. In April 2014, the Inheritance tax threshold will rise by just over 1% from £325,000 to £329,000. By any stretch of the imagination, it's not a big increase and as it's more than a year away (as of December 2012) there's still plenty of time for inflation to make it seem even smaller.
Relatively speaking, £325,000 isn't a 'small' amount of money - it's many times more than the average salary, for example - but let's take a look at it in context. Inheritance tax is a 40% charge on the value of your total assets (your estate) above the threshold. So if your estate is worth a total of £400,000 then the £75,000 above the threshold will be subject to a 40% charge - that’s £30,000 to the tax men and women.
When it comes to calculating your estate, in theory, it's a fairly straightforward sum - everything you own, minus everything you owe. In practice, it can get a lot more complicated, with various exemptions and tax reliefs potentially available. Generally speaking though, your estate will include assets such as any property you own, investments, money and possessions. Subtracted from that amount will be any debts you have such as outstanding mortgages or other loans and unpaid bills. Funeral expenses can also be subtracted from your estate.
For many people, it is property which can cause the total of their estate to go above the Inheritance tax threshold. Although house prices have remained fairly stagnant on average for the last few years, some have still increased in value, or at least held their value.
If you have made any gifts these may still need to be added to the total. The gift may be a Potentially Exempt Transfer but could still be liable for Inheritance tax for seven years after you give them (we've more information about this on our website).
If you are concerned that your estate has the potential to be liable for Inheritance tax, there are a number of steps you can take. Writing a Will in itself will not reduce your Inheritance tax liability, but it will mean that your instructions will be carried out after your death, which could help reduce any Inheritance tax liability for your beneficiaries. A valid Will, drawn up by a solicitor also means that you have a say in where your assets go, and who they go to, rather than it being left to chance, or the Revenue.
Firstly, make an appointment with your solicitor to make a Will, if you don't have one already. If you do, check it: make sure it is up to date and still relevant for your circumstances. It has been our experience that many people dutifully make a Will, but then leave it to gather dust. Any life changes, such as marriage or children, should also be an occasion for reviewing your Will.
Secondly, assess your assets and if necessary arrange an appointment with your accountant or independent financial adviser to make an estimation of how much your estate is worth. Even if you do not currently have assets that total more than the Inheritance tax threshold, your adviser and accountant can help you work out if they might do in the future. If that is the case, then they will also be able to help you put strategies into place to legally reduce your tax liability.
Thirdly, consider including inheritance tax planning within your financial planning as a whole.
It's never too early to start your Inheritance tax planning, for you and your family.
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