Inheritance tax: Graham Southorn explains how trusts can help
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There is an additional ‘residence nil rate band’ (RNRB) of £175,000, for when a home is being inherited, which increases an individual’s nil rate band to £500,000 for their estate, or £1million for a couple. It’s important for Britons to be mindful of the rules and structure their affairs to avoid leaving a hefty tax bill for their inheritors. Writing a will is one way to do this.
Dicky Davies, founder and business development director at Tower Street Finance, spoke to Express.co.uk about the importance of having a will in place.
He explained what happens when someone does not have a will in place: “When someone dies without making a will, the inheritance will be distributed in line with the rules of intestacy.
“One of the rules is that the surviving spouse (or civil partner) receives the first £270,000 of the estate, plus 50 percent of the remaining estate, with the rest distributed to spouse/civil partner and children.
“Inheritance tax will be paid on the value of the estate above any allowances, such as the single person’s £325,000 allowance (called Nil Rate Band).”
But Mr Davies said having a will in place can make a big difference for the IHT liability of an estate.
He said: “However, if there is a will, it is possible to leave all of the estate to the surviving spouse (or civil partner) and it be free from inheritance tax.
“Clearly when the second spouse/civil partner dies then IHT will be payable on the combined estate, but there will then be two sets of allowances to utilise. Note that this only applies to married couples/civil partners – it does not apply to unmarried/cohabiting couples.
“If you leave your property to your children/grandchildren in your will, there will be an additional IHT allowance of £175,000 per person, called the residential nil rate band.
“So one person can have up to £500,000 of allowances (£325,000 plus £175,000), or for a couple it can be £1million of IHT allowances which can significantly reduce the IHT burden, but only if there is a will written.”
The financial planning expert also spoke about trusts as another way to slash a person’s IHT liability.
He said: “The other option to avoid IHT by writing a will is to put the assets into a trust structure, so they are not included in the estate when calculating IHT on death.
“Again, this is not possible if there is no will written. Finally, if you leave money to charity in your will, that money is exempt from IHT. In addition, if you leave more than 10 percent of your net estate to charity, you can reduce the IHT rate from 40 percent to 36 percent.
“In all cases, it is best to get professional advice on how to write your Will, to ensure maximum IHT efficiency.”
Another way for a person to reduce the size of their estate and reduce their IHT liability is to give away gifts.
An individual can give away up to £3,000 each year, split between any number of people, or give away any number of gifts worth £250, to different people.
Britons can also give away money when a person gets married or enters a civil partnership, as a means to reduce the size of their estate.
A person can give away up to £5,000 to a child, £2,500 to grandchild or great-grandchild or £1,000 to anyone else, and avoid the tax.
People can also give away a larger amount and still avoid IHT, as long as they survive for seven years after the gift is given.
In this case, the tax rate for the gift reduces from 40 percent as the years progress towards the seven-year anniversary from when the gift was given.
Gifts to charities are also exempt from the tax, and a person can reduce their inheritance tax rate to 36 percent if they leave 10 percent or more of their estate to charity.
The reduced 36 percent rate will apply to the rest of their estate after the portion going to charity has been deducted.
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