Inheritance tax is not well-liked among many Britons, but understanding the charge is key as it allows people to look towards how best to ensure their loved ones are provided for. For those hoping to leave money or other assets to their family members after they pass away, planning ahead is vital. Anthony Ward, Head of Wealth Planning at Barclays UK, has shared important tips for people to consider relating to inheritance planning.
There are also other important exemptions to bear in mind which are tax-free and potentially beneficial.
Each tax year, a person can give away wedding gifts of up to £1,000 per person, £5,000 for a child and £2,500 for a grandchild or great-grandchild.
In addition, people can give payments to help with another person’s living costs, for example, an elderly relative or a child under the age of 18.
And people can give as many gifts of up to £250 per person as they want during the tax year, as long as the exemption hasn’t been used on the same person.
An understanding of Inheritance Tax is key, alongside the seven year rule, as this can often be a complicated topic.
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Inheritance Tax is only paid if the value of a person’s estate reaches above £325,000 and is charged at 40 percent on anything above the threshold.
But the threshold can rise to £500,000 if a person decides to give away their home to grandchildren or other direct descendants.
However, the seven year rule means gifts made three to seven years before a person’s death are taxed on a scale known as ‘taper relief’.
Gifts made less than three years before a person dies have a 40 percent tax charge, reducing to 32 percent for gifts given three to four years before death.
Tax is charged at 24 percent for gifts handed over four to five years before death, and at 16 for gifts five to six years before death.
Finally, a tax rate of eight percent is charged for gifts given six to seven years before death, and tax is eliminated altogether if the gift was given seven or more years before death.
Aside from Inheritance Tax, planning through discretionary trusts can help, Mr Ward explained.
He stated that for those who wish to give future gifts to grandchildren or any younger family members, such an option could be favourable.
Mr Ward said: “Discretionary trusts allow you to indirectly gift money to beneficiaries and offer a more flexible platform that you can adapt around your needs.
“They run for up to 125 years and have the added benefit that, while the money is still held in the trust, you can keep some control over how it is spent.”
But it is important to research this in detail, as these gifts can only be given in the event of a person’s death.
Finally, Mr Ward highlighted stakeholder pensions as a good way of inheritance planning, as compound interest is likely to be beneficial.
Stakeholder pensions allow pension investment in another person’s name, so they will be able to access the money once reaching the age of retirement.
While investments do rise and fall, this long-term method is likely to help with the myriad of costs associated with later life.
Concluding on inheritance planning, Mr Ward commented: “We’ve seen a real shift over the past few months as COVID has led many to re-evaluate their priorities when it comes to sharing their wealth with loved ones.
“Instead of us asking people what their plans are for giving money or assets to family members, we’ve had an influx of people asking ‘how can I gift money safely and as tax efficiently as possible?’
“No matter how much you’re looking to share, there are a number of factors to take into account to ensure that you don’t lose out. It’s always worth the time to do your own research and, especially where larger figures are involved, consider expert advice.
“Remember too that tax rules can change in the future and their effects on individuals will depend on their circumstances.”