Inheritance – A Simple Way To Save Giving It To The Tax Man
Inheritance tax has long been the subject of heated discussion, but the chances of it being abolished any time soon, are very unlikely. So for most people, the choice of making a financial plan to deal with it, or leave your loved ones to foot the bill, is somewhat important.
Inheritance Tax Is A Growing Concern
Under current rules, transfers of assets between families and civil partners are normally ignored for the purposes of any tax, including inheritance tax. Each person can leave an estate of up to £325K to any other person or organization before Inheritance Tax becomes payable.
Inheritance Tax is charged at a flat rate of 40% (with a reduction of 4% where the deceased has left a minimum of 10% of their assets to charity).
Any unused portion of this allowance can be transferred to the surviving spouse/civil partner as a percentage. For example £162.5K would be transferred as an allowance of 50% extra. This means that the surviving spouse/partner would be able to leave a tax-free estate consisting of their own personal allowance plus an extra 50%.
Comparing these figures with current house prices, it’s easy to see that many home owners may find that their estate will incur inheritance tax.
Inheritance Tax Must Be Paid Before The Estate Is Released
Upon a person’s death, their executor must inform the Inland Revenue of the value of that person’s estate. They will then receive formal notification of how much tax they are required to pay. Generally, this must be paid within 6 months of the deceased’s death. If it is not, the Inland Revenue will charge interest on the outstanding balance. Although the payment can come from the deceased’s estate, it must be made before the majority of the estate is released.
There is an exception for funeral costs, although the bank or building society must agree to let the executor access to the account. If they don’t, these can be recovered from the estate and can be deducted from its value for tax purposes. Altogether this can all mean that families who have worked hard at organising their money to put their family finances in good order can find themselves under enormous financial pressure at a time when they are likely to be feeling understandably emotional.
Planning ahead with the help of a tax adviser can help to reduce the stress when dealing with a bereavement.
Life Insurance Can Be A Lifeline
Life insurance can be a very efficient way to ensure that there are funds on hand to cover Inheritance Tax and funeral costs. Rather than naming an individual as a beneficiary of the policy, the holder can request that the final payout be made into a trust, held on behalf of your chosen beneficiaries.
In this way, the funds will be kept separate from your estate and can be released immediately (and fairly simply). This can also help to make sure that a surviving partner and/or children have enough money to live comfortably while validation is being confirmed.