Introduction
There comes a time for all of us when our minds turn towards the end game and optimising our plans for when we’re gone. There are all kinds of planning opportunities to be had for making the most of our wealth, and that’s the subject of the next couple of posts.
For most of us, the ideal end game is passing away peacefully in our sleep at the age of 100, having enjoyed excellent physical and mental health, never needing long-term care and with all our financial ducks in a row. Many of us would like to spend our last penny the day before we die, but many of us would also like to give some money to our family or to the causes we care about.
I want to try and cover this vast area of financial planning, or at least the parts of it that most of us need to know and do, so that at least we’re armed with some good information. Slightly different format to the other Ultimate Guide blogs – what follows is something of a stream of consciousness on the subject with action points scattered throughout.
It just didn’t really lend itself to a neat division of what you need to know and what you need to do style that I use in most podcast episodes. Well, maybe it could, but it didn’t end up that way!
Inheritance Tax is out to get You
Inheritance tax used to be a problem for rich people, but with the relentless march of house prices and a Nil Rate Band which has stayed fairly static for ages, more and more people are now paying inheritance tax. The Nil Rate Band is the amount of your estate you can leave to the next generation without paying IHT.
There are two Nil Rate Bands. The first is for everyone and it is currently £325,000. On top of this is the Residence Nil Rate band, which is an additional £175,000, taking the total to £500k. If you have a couple and they leave everything to each other, and then to their kids, then they can leave up to £1m tax-free, as long as there’s a house in there somewhere, or has been.
It sounds simple, and it sort-of is, but as with anything in the UK tax-code, there are wrinkles and exceptions and all sorts of things to be aware of. The residence NRB is withdrawn if your estate is over £2m, for example. And you have to leave your property to a direct descendant, not to a nephew or niece or whatever. Which sucks if you don’t have kids.
ACTION POINT: …you need to seek legal advice – don’t leave this stuff to chance or pin your hopes on the words of a Northern podcaster!
You can Give Away What You Want
I get asked all the time: ‘how much can I give away?’ The answer is, as much as you want! I know what people mean – they want to know how much they can give without any tax implications either now or on death, but the point is important. You can do what you want with your own money; there just may be tax implications.
Understand the Seven-Year Rule
Most people know something about the seven-year rule, but lots of people misunderstand it too. Remember that inheritance tax is chargeable on the estate of the deceased, so it’s unlikely that HMRC will chase the recipients of any lifetime gifts unless there is not enough money left in the estate to pay the tax.
The seven-year rule says that once seven full years have passed since the date of any lifetime gifts were made, then they are no longer factored in when calculating the IHT on an estate. The amount of tax potentially payable on a gift reduces after three full years down to nil after seven full years.
Any gifts use up the Nil Rate Band first. So if you make a gift to your kids of £325,000 and die three years later, then there will be no NRB left for your remaining estate. Think of a timeline. When you die, your executors will need to look back seven years at any gifts made so they can report properly to HMRC. That means…
ACTION POINT: …you need to keep good records if you’re planning to make gifts of any size. Keep a log of each gift you make with the date, recipient and how much on it. Make sure your executors know where to find it. Keep it with your will.
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