Inheritance tax: Financial advisor provides advice
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Inheritance can be a complicated issue if people are not taking action ahead of time to ensure their affairs are in order, and the key document which is considered the best way to do so is a last will and testament. Tomorrow marks the start of Free Wills Month, which provides Britons with an opportunity to gain a free will service if they are over the age of 55. There are a number of reasons as to why writing a will is a good idea, namely for those who want to ensure their family and friends are protected after they pass away.
However, Inheritance Tax is an especially important issue. This is because the levy could cost individuals potentially tens or even hundreds of thousands of pounds, and so it is important to take preventative action.
Emma Watson, Head of Financial Planning at Rathbone Investment Management, explained the kind of steps Britons can take, and why these should be considered.
She said: “It’s hard to imagine let alone plan for a future that you’re not in but spending time now considering what you would want for your family can save a great deal of heartache for them in the future.
“Of course, this sort of preparation does nothing to protect you against the worst happening but it can make sure that if disaster strikes your family, they don’t have legal and financial troubles at a time when they will be least able to deal with them.”
The financial expert shared some tips to help Britons sort out their financial affairs, avoid unnecessary tax, and to make the process as smooth as possible, at what is already likely to be a challenging time.
Firstly, she said it is important to consider protecting one’s family, especially dependents – that is, children or stepchildren under the age of 18. This does not just have to be a monetary matter, and many people will want to put in place an arrangement as to whom they would entrust to care for their children if they and their partner were to pass away suddenly.
As this is such a significant decision, Britons are encouraged to speak to the people they wish to appoint as guardians, and to ensure this is reflected in a legally binding document, so the decision is not left to the courts.
Secondly, protection of a partner could be key, especially if a person is not married. Under current law, unmarried couples are largely unprotected if one person were to die in terms of property, money and other assets. Thus, people are urged to make sure their will reflects their last wishes in this regard.
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But a particularly important issue which permeates estate planning is Inheritance Tax, charged at 40 percent above a particular threshold on the estate of a person who has passed away.
Understandably, many people will be keen to avoid this levy as much as is legally possible, and so there are some key steps Ms Watson has said Britons should consider taking to protect their estate.
Keeping below the IHT threshold is particularly important, as the nil-rate band means the first £325,000 of chargeable transfers are taxed at nil percent, so are effectively tax free. However, to avoid tax above this limit, people can leave everything to a spouse, civil partner or charity.
Individuals may also wish to consider placing money into a trust, Ms Watson added, which means they no longer form part of a person’s estate for IHT purposes.
However, the rules around trusts can often be complicated, and with changes over the years, it is important to be careful. If considering this option, Ms Watson finished by stressing taking financial advice.
Peter Hamilton, Head of Market Engagement at Zurich UK, also provided insight into Inheritance Tax, pointing out the number of people paying the sum continues to grow.
He has urged people to use this opportunity to get their affairs in order and ensure they are not paying anything unnecessarily.
Mr Hamilton said: “There are several ways to mitigate IHT. From lifetime gifting to setting up trusts. However, for many, having the funds available to pay the tax via an insurance policy can be an important and helpful option.
“Having the funds available to pay the tax on death could avoid your loved ones having to sell the property or other illiquid assets at what might not be the most opportune time, simply to meet a tax liability.
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“If the IHT liability is funded for, rather than reducing the value of the estate, both the executors and beneficiaries will be happy.”
However, an equally important point, Mr Hamilton stressed, was having a conversation with one’s family and friends about IHT liabilities.
Keeping the idea open and discussed, he suggested, could allow families to make IHT efficient gifts by passing on assets when a person is still alive.
He concluded: “More people are looking at passing on assets while they are alive, helping to pay for house deposits, weddings, private education or university fees for grandchildren and in some cases helping to start businesses.
“Another alternative is for parents to maximise their personal use of all their assets while they are alive, but use a life insurance policy to preserve the gifts they would otherwise have made.
“Make sure you talk with your adviser and your family regularly to ensure that your will planning is up to date and develops with your circumstances. This includes factoring in any changes to legislation.”
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