Many people consider inheritance tax to be voluntary tax on those who fail to plan or trust their families. It’s a funny tax because there is a large £650,000 tax free threshold for a married couple, but then it kicks in at the very high rate of 40%. Incidentally a relatively modest house in London is now valued at in excess of the tax free limit. My clients detest the idea of 40% of their already taxed income going to the state. They worked and saved to benefit themselves and those they love. So what can be done?
Giving your money away is the easiest thing. Small gifts out of income generally fall outside inheritance tax, but if you live 7 years after a capital gift that can also fall outside your tax taxable estate. Why not? We don’t feel comfortable just giving out money away, after all these are assets we’ve accumulated through hard work and thrift. We want to keep control of our money, we may want access to our money and we definitely don’t want to give our money to our former son or daughter-in-law in a divorce settlement! But gifts can be part of the mix, they have the advantage that you can enjoy watching your children’s lives being improved though your money.
Important assets can fall outside your estate including business property and potentially your pension assets. The new pension rules have interesting inheritance tax implications, and the rules on what is business property are surprisingly widely drawn.
What should you do now? Make a will. Get professional advice. Consider some gifts. Only do things you feel comfortable with.