a short introduction to inheritance tax - nfu mutual · nfu mutual select investments limited (no....

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A short introduction to INHERITANCE TAX FACT-IHT-0419.indd THINGS TO THINK ABOUT First, decide who you want to inherit and make sure your will is up to date. Next, work out how much inheritance tax would be payable if you die. If you’re married you should also work out how much would be paid after you’ve both died – it might be diferent according to who dies frst. Think about what you can do to reduce the potential tax. Can you give away money or assets, or set up a trust? If you give away enough and survive seven years you can avoid inheritance tax altogether, although this may be neither practical, nor desirable. If you have a pension, or a life insurance policy make sure they are written in trust. The changes to pension rules can also help with passing money on to your family and there are other types of insurance plans available that can help reduce the bill. Finally, if you have farming or business assets, the inheritance tax reliefs are vital, but easily lost. Professional advice can be invaluable. NFU Mutual has a long history of giving people sound fnancial advice. If you would like advice on inheritance tax, investments, pensions or insurance, please contact your local agent or call us on 0800 622 323. NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We will explain the advice services we ofer and our charges. This short introduction is based on our understanding of the law and HMRC guidance as at April 2019. You should not take or refrain from taking action based on this information, without frst taking professional advice based on your own circumstances. If you’d like this document in large print, braille or audio, just contact us. nfumutual.co.uk To fnd out more about how we use your personal information and your rights, please go to nfumutual.co.uk/privacy. To stop us contacting you for marketing write to Marketing Department (Do Not Contact Me), NFU Mutual, Tiddington Road, Stratford upon Avon, WarwickshireCV37 7BJ or contact your local agency. NFU Mutual Select Investments Limited (No. 8049488). A member of the NFU Mutual group of companies. Registered in England. Registered offce: Tiddington Road, Stratford-upon-Avon, Warwickshire CV37 7BJ. For security and training purposes, telephone calls may be recorded and monitored. FACT-IHT-0419 1-2 It is said that if you don’t plan for inheritance tax, your children will pay the price. This short introduction will give you an understanding of how inheritance tax works. We cannot hope to cover every detail in a few pages, so we recommend you speak with an NFU Mutual Financial Adviser to discuss how you can maximise the amount you pass on to your family. Typically, you’ll pay inheritance tax on everything you own, anywhere in the world, plus certain gifts you’ve made in the previous seven years and any interest you have in some types of trusts. The frst £325,000 is tax-free, and the rest is taxed at 40%. TAX-FREE AMOUNT The tax-free threshold of £325,000 is known as the nil rate band. It has been possible to transfer any unused nil rate band to a widow or widower since October 2009. For example, if your husband or wife died before you and left everything to you, none of his or her nil rate band would have been used because of the spouse exemption. You can then use their nil rate band, meaning that the 31/03/2019 18:08 frst £650,000 of your estate will be free from inheritance tax. You cannot have more than two nil rate bands. Since April 2017, there is an extra tax free allowance, available to those passing on a property that was once their home, to direct descendants. There are special provisions for those who have downsized or sold their house to move into residential care. It is now at £150,000 and will increase to £175,000 in April 2020. The amount will be reduced by £1 for every £2 that your net estate exceeds £2 million. WHY YOU NEED A WILL Making a will allows you to decide who will beneft from your estate. If you don’t make a will, intestacy law determines who benefts, which may not be what you want. Something to bear in mind is that, with a few exceptions, anything you own jointly with someone will pass automatically to the joint owner. It won’t matter what your will or intestacy law states. If you want to leave your share to someone else you can change a joint ownership to a diferent type of ownership called tenants-in-common, and then leave your share to anyone in your will.

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Page 1: A Short Introduction to Inheritance Tax - NFU Mutual · NFU Mutual Select Investments Limited (No. 8049488). A member of the NFU Mutual group of companies. Registered in England

A short introduction to

INHERITANCE TAX

FACT-IHT-0419.indd

THINGS TO THINK ABOUT

First, decide who you want to inherit and make sure your will is up to date.

Next, work out how much inheritance tax would be payable if you die. If you’re married you should also work out how much would be paid after you’ve both died – it might be diferent according to who dies frst.

Think about what you can do to reduce the potential tax. Can you give away money or assets, or set up a trust? If you give away enough and survive seven years you can avoid inheritance tax altogether, although this may be neither practical, nor desirable.

If you have a pension, or a life insurance policy make sure they are written in trust.

The changes to pension rules can also help with passing money on to your family and there are other types of insurance plans available that can help reduce the bill.

Finally, if you have farming or business assets, the inheritance tax reliefs are vital, but easily lost. Professional advice can be invaluable.

NFU Mutual has a long history of giving people sound fnancial advice. If you would like advice on inheritance tax, investments, pensions or insurance, please contact your local agent or call us on 0800 622 323. NFU Mutual Financial Advisers advise on NFU Mutual products and selected products from specialist providers. We will explain the advice services we ofer and our charges.

This short introduction is based on our understanding of the law and HMRC guidance as at April 2019. You should not take or refrain from taking action based on this information, without frst taking professional advice based on your own circumstances.

If you’d like this document in large print, braille or audio, just contact us.

nfumutual.co.uk

To fnd out more about how we use your personal information and your rights, please go to nfumutual.co.uk/privacy.

To stop us contacting you for marketing write to Marketing Department (Do Not Contact Me), NFU Mutual, Tiddington Road, Stratford upon Avon, WarwickshireCV37 7BJ or contact your local agency.

NFU Mutual Select Investments Limited (No. 8049488). A member of the NFU Mutual group of companies. Registered in England. Registered offce: Tiddington Road, Stratford-upon-Avon, Warwickshire CV37 7BJ.

For security and training purposes, telephone calls may be recorded and monitored.

FACT-IHT-0419

1-2

It is said that if you don’t plan for inheritance tax, your children will pay the price.

This short introduction will give you an understanding of how inheritance tax works. We cannot hope to cover every detail in a few pages, so we recommend you speak with an NFU Mutual Financial Adviser to discuss how you can maximise the amount you pass on to your family.

Typically, you’ll pay inheritance tax on everything you own, anywhere in the world, plus certain gifts you’ve made in the previous seven years and any interest you have in some types of trusts. The frst £325,000 is tax-free, and the rest is taxed at 40%.

TAX-FREE AMOUNT

The tax-free threshold of £325,000 is known as the nil rate band. It has been possible to transfer any unused nil rate band to a widow or widower since October 2009. For example, if your husband or wife died before you and left everything to you, none of his or her nil rate band would have been used because of the spouse exemption. You can then use their nil rate band, meaning that the

31/03/2019 18:08

frst £650,000 of your estate will be free from inheritance tax. You cannot have more than two nil rate bands. Since April 2017, there is an extra tax free allowance, available to those passing on a property that was once their home, to direct descendants. There are special provisions for those who have downsized or sold their house to move into residential care. It is now at £150,000 and will increase to £175,000 in April 2020. The amount will be reduced by £1 for every £2 that your net estate exceeds £2 million.

WHY YOU NEED A WILL

Making a will allows you to decide who will beneft from your estate. If you don’t make a will, intestacy law determines who benefts, which may not be what you want. Something to bear in mind is that, with a few exceptions, anything you own jointly with someone will pass automatically to the joint owner. It won’t matter what your will or intestacy law states. If you want to leave your share to someone else you can change a joint ownership to a diferent type of ownership called tenants-in-common, and then leave your share to anyone in your will.

Page 2: A Short Introduction to Inheritance Tax - NFU Mutual · NFU Mutual Select Investments Limited (No. 8049488). A member of the NFU Mutual group of companies. Registered in England

EXEMPT BENEFICIARIES

There is no inheritance tax to pay on anything you give to certain benefciaries. These are:

• Your husband, wife, or civil partner (if UK domiciled)

• Qualifying charities

• Qualifying political parties

• Some national institutions such as museums.

DISCRETIONARY WILL TRUSTS

Before it was possible to transfer the nil rate band, it was common for a husband and wife to include a discretionary trust in their wills. An amount up to the nil rate band would pass into the trust, and everything else could pass to the surviving spouse, tax-free.

The trustees (the people controlling the trust) would have the discretion to pass money to any people named as potential benefciaries, which could include the surviving spouse. Rather than pass money to the spouse it could be loaned, so that it wouldn’t increase his or her estate. Interest could be charged, which could roll up, which would further reduce the estate for inheritance tax.

Trusts can still have a place in inheritance tax planning even though the unused nil rate band can be transferred, for instance:

• Where there is a remarriage and there’s a desire to protect the inheritance for children from a previous relationship

• Potentially protecting assets against future care home costs.

Trusts can be an important part of will planning, but professional advice is essential.

GIVING IT AWAY

You can’t simply avoid inheritance tax by giving everything away just before you die. If you give anything away, or sell it below its market value, it will only be exempt from inheritance tax if you live for seven years after making the gift.

If you have made gifts in the previous seven years they are added back into your estate for inheritance tax, unless they fall into the following categories: • You can give away £3,000 every tax year, and

you can use a previous year’s allowance if it was unused

• You can make gifts up to the value of £250 to anyone

• Gifts on marriage are exempt up to certain limits. Parents can each give £5,000, grandparents £2,500 and anyone else £1,000

• Relief from inheritance tax is available on any amount that you gave by way of regular gifts out of income that didn’t reduce your standard of living.

If gifts are counted back in the estate there may be a reduction in the tax charged if the total is above the nil rate band, according to how long ago the gift was made. For example, if gifts totalling £425,000 are added back, the frst £325,000 uses up the nil rate band and the 40% tax on the remaining £100,000 is reduced as follows: • After 3 years by 20% • After 4 years by 40% • After 5 years by 60% • After 6 years by 80% • After 7 years the gift is exempt Giving certain assets away can also leave you with a Capital Gains Tax bill – please read our Short Introduction to Capital Gains Tax for more information.

FACT-IHT-0419.indd 3-4

GIFT WITH RESERVATION

It’s important that you don’t continue to beneft from anything you give away.

If you do give something away, but retain some beneft from it, its value will still be included in your estate even though it’s no longer yours.

For instance, if you give your house to your children but continue to live in it without paying a market rent, it will be included in your estate for inheritance tax.

PUTTING MONEY INTO TRUST

Trusts can be very useful for succession and tax planning, but if you gift money or possessions into certain types of trusts, such as a discretionary trust, there can be inheritance tax to pay immediately.

Tax is due if, over a period of seven years, you put more into such trusts than the nil rate band. The tax rate is 20% if it’s paid by the trust.

If you die within seven years of making a gift into trust it will be counted back into the estate for inheritance tax like any other non-exempt gift, but the amount of tax due will be reduced by any tax paid when the gift was originally made.

PUTTING LIFE POLICIES INTO TRUST

If you have a life insurance policy that pays out on your death the proceeds will go into your estate and so could be liable for inheritance tax, unless you put the policy into trust.

Naturally, you don’t want your family to lose 40% of the proceeds from a life policy. Fortunately, it’s usually simple to put a policy into trust, although you might want advice to make sure you choose the right type.

IMPORTANT RELIEFS

If you own some types of property, you may get relief from inheritance tax, either at 50% or 100%. An asset that qualifes for 100% relief can be left to anyone without any inheritance tax.

Certain business, farming, woodland and heritage assets may beneft from tax relief. The reliefs are complicated so we have separate Short Introductions for the two most important – Agricultural Property Relief and Business Property Relief.

REDUCING THE TAX RATE TO 36%

You can reduce the rate of inheritance tax from 40% to 36% by leaving at least 10% of your net estate to qualifying charities. Your net estate is the total value of your assets, less any debts, liabilities, exemptions, reliefs, and the nil rate band. The rules are surprisingly complex, with diferent parts of an estate potentially falling into one of three ‘components’, which can change how the tax is calculated. In a simple example, where there’s only a general component, if your net estate is £200,000, inheritance tax would usually be £80,000. If you left £20,000 to charity it would be £64,800 (36% of £180,000), a reduction of £15,200.

Calculating inheritance tax

Mrs Smith is a widow, whose husband had left her all of his estate. When Mrs Smith dies she leaves all her assets to her children. Her tax is calculated as follows:

House £1,000,000 Investments £400,000 Cash deposits £100,000 Personal efects £100,000

Total estate £1,600,000 Less 2 nil rate bands (£650,000)

Less 2 residence nil rate bands (£300,000)

Chargeable to tax £650,000

Tax at 40% £260,000

31/03/2019 18:08