Inheritance Tax Planning – simple tips to retain your wealth
Commercial business owners naturally want to protect the wealth generated from their years of hard work retaining as much as possible to enjoy whilst alive and keeping the rest intact to pass across to their families upon death. Inheritance tax (IHT) can get in the way of this ideal, unless careful planning is considered. Fortunately, there are some simple steps that can be taken to eliminate or at least reduce IHT.
The IHT threshold
Currently, the point at which IHT becomes relevant is when your estate is worth over £325,000 upon death. Estates worth over this threshold could incur up to a 40% tax charge.
Your estate could be money in savings, equity held in property or the value of any other assets owned. And, let’s face it. A lot of people own wealth in excess of this amount nowadays, even without a commercial business, just from watching property prices increase over the years. Technically, anyone can be subject to IHT.
But of course, you don’t want to put restrictions on your earning potential from fear of paying tax either.
Continue reading these tips to give you some initial ideas on how you can be strategic in protecting your wealth and reducing your tax liability.
POINT 1: Gifting money to reduce IHT
All taxpayers have an IHT annual exemption of £3,000 per tax year whereby money can be gifted to your children enabling them to enjoy some of your wealth whilst you are alive. However, you need to consider, how practical this is for you largely depends on the number of children you have, as £3,000 may not go too far if you need to hire a mini bus for your family holiday!
POINT 2: Gifting money from your income to reduce IHT
There is an alternative, or addition, to the above to take into account.
When making “regular” and “structured” payments to your children throughout the course of your life, the tax treatment is somewhat different. Here it is considered that you have excess income available outside that of meeting your own financial commitments and requirements, and subsequently, by making these transfers “regular” it demonstrates that your own standard of living is not compromised by the arrangement you have with your children.
Combined with utilising your annual allowance in Point 1 can very work well for IHT tax planning.
Notes to consider:
• “Regular” means “regular” – so monthly or quarterly, perhaps
• “Structured” should include an official document detailing the payment amount, duration and other factors showing this is a formal agreement
POINT 3: Gifting money from your income into a pension to reduce IHT
A pension can be a useful tax-planning vehicle in itself and coupled with tax planning initiatives to reduce or mitigate IHT can be effective too. Each year, £2,880 can be invested into a registered private pension plan for each child. A pension of this effect can be set up from birth as well.
As an option, the £3,000 annual exemption allowance can be used as a starting point to invest into a pension fund and any additional transfers made can be considered “gifts from income”, depending on the wealth you have available and again, on the size of your family. For example:
If you have just one child then the annual IHT allowance of £3,000 would cover the annual pension allowance of £2,880.
Point 4: Gifting money to a married couple to reduce IHT
The final point covers gifting money to a couple getting married. If this happens to be your child then each parent can gift up to £5,000 and receive IHT relief.
As a grandparent, the limit is £2,500 or if you are just a generous uncle, auntie, cousin or friend then the limit is £1,000.
Gifting using the Marriage Allowance does not affect your Annual Exemption of £3,000 per tax year.
Figurit have years of experience in advising commercial business owners on issues relating to Inheritance Tax. It can be a complex area but there are reassuringly things that can be done to favour your tax position.
To speak to a professional tax advisor, call our helpful team: 020 7376 9333