Rather than spend all their money during their own lifetime, most pensioners hold on to the bulk of their accumulated wealth to pass on to their children or other future generations when they die. By way of illustration, the Institute of Fiscal Studies found that the average retiree draws down only 17% of their wealth between the ages of 70 and 80 and 31% between 70 and 90.
Furthermore, the majority of pensioners who own their own home tend not to access their property wealth at all, although this is usually the largest asset they own outside of any pension pot.
The problem is that, when wealth is passed on to beneficiaries, there can be some serious tax ramifications to consider.
For example, an Inheritance Tax charge of 40% will apply to any amount of your estate that exceeds the nil-rate band (currently £325,000 in 2018-19). An additional band, the residence nil-rate band (RNRB), applies when the family home is passed on to direct descendants, typically the children or grandchildren; this is currently £125,000 (for 2018-19), but is scheduled to rise to £150,000 in 2019-20 and £175,000 the following tax year.
Since these allowances are transferrable between spouses and civil partners, couples could obtain a maximum combined IHT exemption of up to £900,000 in 2018-19 if they meet all the criteria. However, while this may seem generous, rising house prices have made it far more likely that an estate could exceed this value and it is important to take steps to ensure that the total estate value remains under the threshold.
Options you may consider include:
Gifts
Gifts are exempt from IHT provided you live for seven years after making the gift. If you die within this period, IHT will be applied at a tapered rate.
The following gifts can be made each year free of IHT:
- Gifts of up to £3,000.
- Marriage and civil partnership gifts worth £5,000 (to a child), £2,500 (to a grandchild) and £1,000 (to non-relatives).
- Gifts out of income as long as your standard of living is not affected.
- Small gifts up to £250 a person in any one tax year.
- Financial assistance to family or friends.
- Gifts to charities or political parties.
Trusts
The value of an estate can be reduced if your assets are put into a trust which places them under the control of a trustee or group of trustees.
There are typically two types of trust: bare trusts and discretionary trusts that are each treated differently for IHT purposes. The former are exempt from IHT as long as you live seven years after the transfer date, whereas the latter, which give the trustees more powers to manage and distribute assets, are subject to IHT at the lifetime rate of 20% on any transfers in excess of the available nil rate band.
Professional advice should be sought before making decisions about which best matches your circumstances.
Get in touch with us today to discuss your own IHT planning on: 01483 205890