What is inheritance tax? | Gaining an inheritance | Top up your pension with inheritance | Invest it for the future | Write a will | Inheritance tax planning | How an estate is distributed | Questions to ask your IFA about inheritance tax planning | Further inheritance tax advice
What exactly is Inheritance Tax?
Let’s dispel a myth right here and now. You don’t have to be rich for your estate to be subject to Inheritance Tax. Currently it’s levied on everything you leave over £312,000 (2008/2009) See for yourself what it includes:
- your investments and savings
- your home and car
- your furniture and personal effects
- the proceeds of your life insurance, unless it is written in trust.
The rate of Inheritance Tax is 40% for everyone. This is equivalent to the highest current rate for income tax. The tax is paid by those that inherit – and is deducted from the estate on death – so Inheritance Tax is relevant whether you stand to gain an inheritance or you plan to leave one.
1 in 40 people in the UK inherit an average of £17,500 each year. The total after tax is £31 billion.
The average estate leaves £90,000 net of tax and the average amount received by each individual is £17,500, suggesting that, on average, people share out their bequests between five people. Some 10 per cent of beneficiaries receive £50,000 or more. A further 30 per cent receive £10,000 or more, enough to make a down-payment on a home or pay off a sizeable chunk of a mortgage.
However big or small your inheritance, there are a number of ways to put your money to good use. The ideal way, of course, is to invest at least some of it so it grows into a more substantial sum.
Source: International Longevity Centre UK
Top up your pension with your inheritance
With many people now spending as long in retirement as they do in their working lives, it’s wise to add to your pension. Especially when you consider that the state pension is currently only £90.70 a week for a single person and £145.05 for a couple (2008/2009). By making a one-off lump sum payment into your pension fund you can make a big difference to the quality of your retirement.
Another way to invest your inheritance is to place it in an Individual Savings Account (ISA). These are tax-free in the hands of an investor, and could be an ideal way to help save for a rainy day or to give you a more comfortable retirement. Other options to consider include Friendly Society accounts and National Savings and Investments.
For a lot of people, making a will is the most obvious way to plan for the future and the fairest way to provide for loved ones.
Yet, it’s a fact that an amazing 76% of the UK population do not have an up to date will. Dying without leaving a will is called “dying intestate” – which means that all your “wealth” is divided up between each surviving member of your family. If you haven’t any family or beneficiaries, it goes straight to the Crown.
Another drawback of intestacy is the fact that it doesn’t recognise unmarried partners, friends or charities and such like. All this heartache – and the inevitable delays – can be avoided if you make a will.
Your IFA may be able to help advise you on the content of your will, or alternatively recommend the services of a local solicitor. At a cost of around £100 writing a will could save your family many pounds – and much worry.
There are a number of ways your IFA may be able to help you to reduce any possible Inheritance Tax.
Your IFA might, for example, advise you to make gifts now to intended beneficiaries as these gifts are free of Inheritance Tax, providing you live for 7 years or more following the gifts. There are several other tax-efficient ways of making annual gifts, both to individuals and organisations such as charities.
You could then leave a further £312,000 free of Inheritance Tax to them in your will. Gifts between married couples incidentally are not subject to any Inheritance Tax. You might like to think about setting up a trust. If you put part of your estate into a trust for your grandchildren, it could be decades before your cash is again under the eye of the taxman. Trusts can be complicated and your IFA may work in conjunction with a solicitor.
Another option you might like to consider is an insurance policy to pay the tax bill after you die. Your IFA can compare all insurers to help find the right policy for you.
*The spouse will benefit only if he or she survives the intestate by 28 days.
Where a spouse or civil partner does not survive, the intestate estate will be dealt with as if there had been no spouse. This summary represents IFA Promotion’s understanding of the law in England and Wales in April 2008. It does not constitute legal advice and IFA Promotion cannot accept any legal responsibility for it. In Scotland the law is different.
Some questions to ask your IFA about Inheritance Tax (IHT) Planning
- Are there advantages in making grandchildren the main beneficiaries of my will?
- What is the Nil Rate Band?
- What is the IHT liability if I own property abroad?
- Can I “gift” my house to my children but remain living in the property?
- What are the rules relating to gifting personal effects?
- Is any IHT charged on the inheritance left to my partner?
- What are the IHT rules on "gifts within the 7-year period prior to death"?
- How do I set up a family trust?
- Can I really give away £3,000 each year free of IHT?
For further information on the subject contained in this guide, please contact your IFA.
If you do not already have an IFA, our ‘Find an IFA’ hotlines and website enable you to confidentially search for a list of IFAs in your local area. You can search for an IFA based on a whole host of criteria (including product, qualifications, gender and payment options) so you can be sure you’ll find an IFA that meets your precise requirements.
If you are looking for advice on personal finances call the
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If you are looking for financial advice for your business call the
IFA Promotion Corporate Hotline on 0800 085 3251.
Alternatively, for both services visit our website at www.unbiased.co.uk
Printed guides available:
- Independent Financial Advice for consumers
- Independent Financial Advice for businesses
- Investment guide
- Get saving guide
Printed factsheets available:
- Ethical investment – making money with a clear conscience
- The basics of offshore and expatriate finances
- An introduction to insurance
To request one of the above guides or factsheets, please call our Hotline on 0800 085 3250 or visit us at www.unbiased.co.uk
The above guides are available in the following alternative formats: large print, Braille and audio tape. Please call our Hotline on 0800 085 3250 if you wish to order an alternative format.
Other guides available online:
- ISA guide
- Pension guide
- Take Tax Action guide
- The financial practicalities of bereavement guide
- Housing market uncertainty guide
- Equity Release guide
- Surviving an economic downturn guide
- Guide to IFA qualifications
Other factsheets available online:
- Planning for your family
- A parents guide to education fees planning
- Long term care
- Confused about endowments?
- Funding for university
- Remortgaging your home?
- Get your Key Facts straight for financial advice
IFA Promotion Ltd.
Head Office, 2nd Floor, 117 Farringdon Road, London EC1R 3BX.
Tel: 020 7833 3131 Fax: 020 7833 3239 Web address: www.unbiased.co.uk
Registered Office: IFA Promotion Ltd, 90 St Vincent Street, Glasgow G2 5UB.
Registered in Scotland: No.114606.
This guide is issued on behalf of Britain’s Independent Financial Advisers and has been approved by a person authorised and regulated by the Financial Services Authority. This brochure is based on IFAP’s understanding of current tax legislation which is liable to change in the future. The value of tax benefits will depend on your personal circumstances. The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trade-marks of IFA Promotion Limited.
April 2008
