How to avoid the inheritance tax monster munch
Rapidly rising property prices give confidence to Britain's homeowners, with the average UK house now valued at £253,000 according to the Office for National Statistics. But, as the value of your bricks and mortar increases, so too does the risk of leaving your loved ones an inheritance tax (IHT) bill.
Inheritance tax is payable when you die if the value of your estate, which includes possessions, savings and investments, property and your share of any jointly owned assets, exceeds the nil rate band - £325,000 in 2014/15.
Hit this threshold, and everything above it is taxed at 40 per cent. So, for example, an estate worth £500,000 would have an IHT liability of £70,000 (£500,000 - £325,000 x 40 per cent).
The simplest way to chip away at your liability is to take advantage of your allowances and exemptions, says Sam Barratt in: Planning how to use your IHT allowances, trusts and exemptions.
Even where a property doesn't automatically trigger an IHT liability, other factors are helping to pump up the risk of paying this tax. Stock market investments are performing well, with the FTSE 100 hitting a 15-year high on 13 May 2014.
Additionally, proposed changes to the way we take retirement income could see more of us cashing in our pension pots and sitting on the cash instead of taking an annuity. While offering flexibility, this move will also serve to swell the value of an estate for IHT purposes.
On top of this, the nil rate band has remained at £325,000 since April 2009 and, following an announcement in the Budget in 2013, is set to remain at this level until April 2018.
The rising value of estates coupled with the frozen nil rate band inevitably means more of us will end up paying IHT. 'It's estimated that 72 per cent more estates are caught by IHT now than five years ago,' says Jonathan Rimmer, chartered accountant and chartered financial planner at James Holyoak and Parker.
'But as many as four out of five estates that paid IHT could have reduced or abolished that payment if planning steps were taken through the individual's lifetime.'
ASSESSING YOUR SITUATION
To determine which IHT planning strategies are most appropriate, you first need to understand the nature of your problem. 'Itemise all your assets to work out the value of your estate,' says Jason Witcombe, certified financial planner at Evolve.
'This will show you if you have an IHT liability and will also highlight the types of planning you might want to put in place. Getting the value of your home out of your estate can be difficult but, with time on your side, it's relatively straightforward to remove other assets such as savings, jewellery and antiques.'
Your marital status could also affect the steps you need to take. Married couples and civil partners can transfer or leave assets to each other freely, without any potential liability to IHT.
They can also benefit from the transferable nil rate band, which allows any unused allowance on first death to pass to the surviving spouse, effectively doubling the amount they can leave tax-free without the need for further planning.
Importantly, although this option was only introduced in 2007, as long as you can provide supporting documentation including the death certificate, your marriage certificate and any will, it doesn't matter when your spouse died.
For example, if Mr Jones died in 1996, leaving everything to his wife and therefore exempt from IHT, when she dies her estate could take advantage of two nil rate bands, currently worth £650,000 in total. This makes it easier to plan, as it's more likely that the value of the home will fall entirely within this larger nil rate band.