If it is applicable to you though, it is something that you really should plan for on behalf of your family. Put simply, inheritance tax is money owed to the Treasury based on the worth of your estate. The term ‘estate’ applies to everything that goes towards making up your total financial value.
If you’re not that familiar with the different types of taxation you can be liable for, such as inheritance tax, you’re not alone. Indeed, as this will only ever apply after your death, you could be forgiven for thinking “why is inheritance tax planning important?”
What it boils down to is that this is something that will have to be paid by your surviving family after you have gone, and when they will potentially be in a vulnerable emotional and financial state.
What precisely does inheritance tax entail?
Inheritance tax is money levied on the estate of a person after they have died. That means the tax due is taken out of this, which covers any money the deceased person left as well as their possessions and properties.
In the UK, the standard rate at which inheritance tax has been set is 40% of that estate. That may all sound quite worrying to you, but it is important to note that not every family will be liable to pay inheritance tax.
It is a form of taxation that applies to those who have left behind considerable financial assets in the wake of their deaths. The threshold below which it is not applicable in this country is £325,000 at the moment, which is fairly high.
What that means in real terms is that inheritance tax will only be owed for parts of your estate that are valued at more than £325,000. For a great many people, there will nothing of that value, making this tax non-applicable.
Where inheritance tax can come into play is if you own a home in an area of the country with very high property valuations, such as London or the South East. Equally, if you earn a high income in your job during your lifetime, you are very likely to leave behind an estate of the size and value that will require your family to pay this tax on it.
The existing rules state that it has to be paid in full within six months of your death, otherwise HMRC will add interest payments on top of the tax owed. Tax on some parts an estate, such as property, can be paid over a longer period, but interest will still be charged in that situation.
Why is it important to plan for inheritance tax?
Already, you should have some idea of whether inheritance tax is something that is likely to apply to you or not. However, even if it is, it will only become an issue after you die, so why is it so important to plan for it?
There are several key reasons:
Providing for your family
Most people seek to build up an estate during their lifetimes, at least partly, to ensure that their loved ones are provided for after they have gone. Even though inheritance tax is only paid on large and valuable estates, the size of the payments involved will seriously cut into any savings and other assets you have left for your family.
Most people would prefer their nearest and dearest to benefit from these, rather than the taxman.
Relieving the emotional burden
Inheritance tax at 40% of an estate’s value is a big financial burden, even for people who are relatively comfortable. However, beyond that, it is also an emotional one.
The last thing your grieving family will need while trying to come to terms with their loss is pressure to meet a sizeable tax bill. The requirement to pay it within six months gives them little time to sort things out and will add monetary worries to the grief they already feel.
Consulting an independent financial advisor in Shropshire or wherever you happen to live will enable you to plan in advance to reduce this tax liability and save them that strain.
Keeping your financial house in order
Making plans to address the inheritance tax issue should be seen as part of a wider financial planning process. If you have significant assets, it is a good idea to make such a plan because you will know what you can afford to use for different parts of your life.
From your retirement to leaving a legacy for your children or other dependents, putting together plans with a wealth manager will help you to feel in control of your life and the future.
How can you plan for inheritance tax?
There are steps you can take to prepare for inheritance tax liabilities and also to reduce the sum that will have to be paid. This is known as estate planning.
Estate planning to try to minimise the amount of inheritance tax that will be owed can be a complex matter though. Unless you happen to work in the financial services industry yourself, you will almost certainly need the advice of a specialist in this area to handle it effectively, and in a way that does not breach any laws.
One option for cutting the size of a future inheritance tax bill is to place any assets that would come under the scrutiny of HMRC into some form of trust. Your heirs would then be legally able to access them at a certain date in the future that would be determined by you with the help of your wealth management advisor.
Another possibility that can be explored is to considering leaving the estate to your civil partner or spouse. In certain situations, this can help to prevent too much of its value being swallowed up by inheritance tax payments in the wake of your passing.
Any pensions you have can also be a very important part of planning your estate to limit future inheritance tax. That is because inheritance tax calculations do not include money from pensions.
A wealth management advisor will be able to show you ways of financing your plans for retirement through alternative methods like investments. That will enable you to leave the money from any pensions you might have untouched, and that cash can be handed down to your relatives after your death without being liable for taxation.
Another option that such an advisor may discuss with you in greater detail is that of signing up for some form of life insurance. It is not something that is widely known outside of specialist circles, but the cash from such a policy can be used for paying off outstanding tax liabilities after the death of the policy holder.
That includes demands for inheritance tax, and doing so will ensure that parts of your estate such as your home do not need to be sold to cover the cost of these bills. Thus the conversation with your financial advisor should include both inheritance tax reduction and mitigation strategies.
You now have the answer to the question of why inheritance tax planning is important. More and more people are facing these bills as property values soar upwards. Planning is crucial to save your family from having to deal with them at a time of grief, and to ensure that they are provided for.
