We spend all our working lives accumulating assets - houses, cars, investments etc - to ensure that we can enjoy the sort of lifestyle we would like to become accustomed to.
What happens then? Do we spend it? Do we give it to the children? Or do we give it to the taxman? I know what my preference would be!
Inheritance Tax isn’t only applicable on death – there are many potential situations where a charge could be payable during your lifetime.
The current rules on Inheritance tax (IHT) depend on when the transfers are made. Everybody has a nil-rate band, which currently stands at £325,000. This nil-rate band can be used up by making chargeable transfers during lifetime. Any chargeable transfers made during lifetime which exceed the nil-rate band are taxed at 20% on the excess at the time. In the unfortunate event of death within seven years of making the transfer, IHT is then recalculated at the death rate of 40%, however, allowance is made for tax already paid and taper relief is available where the donor survives the original gift by at least three years.
On death, tax, at the rate of 40%, is payable on the value of all chargeable assets in excess of the nil-rate band. Any lifetime transfers drop out of the calculation once the donor has survived the gift by seven years.
There were promises before the last General Election that the nil-rate band would be raised to £1 million, however, that isn’t going to happen in the foreseeable future - in fact the nil-rate band will stay at its current level until at least 2019. The impact of this is that more and more families be getting caught up in the IHT trap.
Roy Jenkins MP in a House of Commons debate in 1986 said "Inheritance Tax is, broadly speaking; a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue."
What can you do about your potential IHT liability? Start planning and start planning now!
There are many ways that a Financial Planner can help families with IHT-effective strategies reduce the impact on the family finances. Why not find out how you can ensure that the money stays in the family for the benefit of your children and grand-children?
If you would like to talk to someone about your own family circumstances give us a call at FMB and see how we can help you.
Please note that the Financial Conduct Authority does not regulate tax advice.