Great news everyone, records are breaking! Unfortunately, not the records we had hoped for. Recent headlines confirm that HMRC is on course for a “record year” of inheritance tax revenue.
Firstly, what is inheritance tax, and should it be something you are concerned about?
Inheritance tax, or IHT, is a 40% tax based on your total assets when you die. The good news is that a married couple who own property together, are likely to have a combined inheritance tax allowance amounting to £1m. The bad news though, is that allowances have been frozen for several years and look to stay that way for the foreseeable future. If your assets continue to grow, then although you might not have an IHT problem now, you might start to fall into IHT’s clutches in the future. With IHT being charged at 40%, it can be a painful hit for those with large estates.
So, what can you do to reduce an IHT liability?
The first area to explore is if you can spend more on the things that you enjoy and make you happy, or gift more to family, friends or charities close to your heart. One of the most common questions we get asked is around gifting, and whether there are any limits involved. The short answer is that there are no limits to what you can gift (providing you live 7 years after the gift), and no tax implications for the recipient (providing you’re gifting cash). But what about if you don’t know how much you could spend sustainably? Either on yourself, or those people or causes close to you. What could be useful is a longer-term financial plan to illustrate how much you can enjoy yourself, without worrying that you might run out of money.
Our next port of call when thinking about inheritance tax is to think about your pension provision. This maybe feels like a curve ball, but saving into an appropriate pension plan is one of the best ways to help reduce your estate, because most modern pensions are exempt from inheritance tax and do not form part of your estate. Plus, you get the double win of tax relief of up to 47% on money you save into your pension. It’s really a win-win – you’re saving for your future, and for future generations.
But, what about if you’re retired?
Why would you carry on saving into your pension if you’re going to spend it? Well, I’d start with thinking about how you’re planning to fund your retirement. If your pension is a fully flexible one with all the right features, you’ll be able to pass it on to your beneficiaries free of that nasty 40% IHT hit. That being the case, it should really be the last place you draw money from to cover spending in retirement, if you’ve got other assets that can be used first.
And what about if your pension isn’t a fully flexible plan?
Not to worry. The more old-fashioned styles of pensions can often be transferred into a suitable pension product. Care must be taken with any historic pension as they sometimes have valuable guarantees or benefits that would be lost upon transfer. It may be the case that you’ve collected a number of pension pots over the years, in which case it might be time to review whether they are still fit for purpose, or whether they need looking at, especially given the dramatic change to pension rules over the past few years.
Finally, what if you’re not earning?
So you’re retired, or between jobs. You’re always allowed to pay at least £3,600 gross into a pension per tax year, as long as you’re under 75. That would only cost you £2,880, with HMRC giving your pension £720 for free as part of the tax relief rules. That might not look like an exciting number in isolation, but if you regularly do this, the savings can be pretty powerful:
Sounds appealing doesn’t it? It’s worth saying, a few technical details need to be ironed out to ensure the rules are followed and that is where we come in. We would look to understand what your future looks like, what the best course of action is and where your pension provision sits within your overall plan. We would ensure you have the right nominations in place for your pension to be properly passed on without inheritance tax. Also, transferring an old pension isn’t always the right thing to do so asking a reputable firm to do the proper analysis on this is important.
This is a huge topic with quite a bit to digest but the main takeaway is to ask yourself:
Should you need to speak to an adviser to explore this in further detail, please contact us.
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This communication is for general information only and is not intended to be individual advice. It represents our understanding of law and HM Revenue & Customs practice. You are recommended to seek competent professional advice before taking any action.
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