Podcast Summary
Inheritance Tax, Thresholds and Exemptions: Though only 4% pay Inheritance Tax, many are confused about it. Married/civil partners' assets are exempt, and the threshold is £325k, rising to £500k for leaving a home to offspring. Unused allowance can be passed on, and gifting rules apply. Home sale proceeds count if sold after July 2015.
While only 4% of estates actually pay inheritance tax, many people are confused about the tax thresholds and exemptions. Inheritance tax is not paid on anything left to a married or civil partner, and there is a threshold of £325,000 for leaving assets to others, which can be boosted to £500,000 if the main residence is left to offspring. The unused allowance can be passed on to a spouse, and there are gifting rules to help reduce the tax liability if necessary. The main residence exemption applies even if the property has been sold before death, as long as the proceeds are included in the estate and the sale took place after July 2015. There is no time limit for adding a late spouse's main residence exemption to the estate. It's important to understand these rules to avoid unnecessary worry and potential financial consequences.
Maximizing Nil Rate Band for Care Home Fees: If a home is sold to pay for care home fees, the full nil rate band for residences may not be maximized. However, executors can nominate which property to allocate the additional main residence allowance against to minimize inheritance tax.
If a home has to be sold to pay for care home fees, the nil rate band for residences can still be utilized, but it may mean that the full allowance is not maximized. For instance, if an estate is worth £1,000,000 and has been downsized, the allowances, including the normal nil rate band and the additional main residence allowance, will cover the estate. However, if the estate has been run down over time to pay for care home costs and comes in at less than £1,000,000, no inheritance tax will be payable, but the allowances will not be fully utilized. In another scenario, if an individual owns multiple properties and has lived in each of them for significant periods, their executors can nominate which property to allocate the additional main residence allowance against. This means that when that house is passed on to direct descendants, it will have an extra £175,000 or possibly £350,000 (if it's passed on from a spouse) tax-free on top of the person's other allowances.
Inheritance tax allowances: The rules for inheritance tax allowances depend on various factors such as time of death, marital status, and property condition. Seeking professional advice is crucial to navigate the complexities.
The rules surrounding inheritance tax and the allowances that can be claimed depend on various factors such as the time of death, marital status, and the condition of the property. For instance, in the case of a deceased person who died before the spousal exemption took effect, their surviving spouse may still be able to claim the deceased spouse's allowance if all of the estate passed to them. However, finding the necessary paperwork from decades ago can be a challenge. Additionally, the value of the estate is determined by its condition at the time of death, and ongoing expenses related to improving the property cannot be offset against inheritance tax. If a widow or widower cohabits without remarrying, they could potentially have more nil rate bands to utilize. In the case of Sarah and her brother, they discovered they would need to pay inheritance tax on their aunt's estate, totaling around 1.3 million, and were concerned about finding the necessary funds within six months. Unfortunately, there seems to be no alternative but to pay interest on the tax until the estate clears probate. Overall, the complexities of inheritance tax and the various factors that come into play make it essential to seek professional advice when dealing with such matters.
Probate Tax Payment Strategies: To minimize interest accumulation when dealing with an estate during probate, utilize liquid assets for tax payment, consider installment plans for land and property, expedite the process by obtaining probate and selling property as soon as possible, and be aware of potential probate delays and changes to fees.
When dealing with an estate during probate, it's crucial to utilize any available liquid assets to pay inheritance tax directly to HMRC to minimize interest accumulation. If there isn't enough liquidity, consider paying the tax in installments for land and property, understanding that interest will accrue over the payment period. To expedite the process, aim to obtain the grant of probate and sell the property as soon as possible after the grant is issued. This will help minimize the overall interest paid. Additionally, probate delays have been a common issue, with six months being a typical wait time and over a year being possible. Probate is the document that grants executors the authority to manage an estate and allows assets to be cashed or sold. The probate service has moved online, but there have been delays due to a high volume of applications and changes to probate fees.
Probate process improvements: Despite challenges, grants are being issued faster than applications are submitted. Quick grants available for properties under offer or financial hardship cases. Annual gifting allowance of £3,000 per donor, with potential carry-forward. Gifts from surplus income are tax-free, but regular review is necessary. Capital gains gifts not eligible as surplus income.
Navigating the probate process during times of system changes and unforeseen circumstances like the pandemic can be challenging and time-consuming. However, there are improvements being made, and grants are currently being issued faster than applications are being submitted. For those seeking to expedite the process, there are specific circumstances where a grant can be obtained quickly, such as when a property has already gone under offer or in cases of extreme financial hardship. In terms of gifting, individuals can give away £3,000 annually per donor, and if they haven't used their previous year's allowance, they can carry it forward. Gifts made from surplus income are also tax-free, but it's essential to identify and review surplus income regularly to provide evidence for executors. Gifts from capital gains, such as selling a rental property, cannot be given away as surplus income. Overall, patience and careful planning are key when dealing with probate and gifting during uncertain times.
Inheritance tax planning, gifting and trusts: Effective inheritance tax planning involves understanding rules for gifting, such as 7-year rule and nil rate band, and utilizing trusts to manage assets and reduce exposure, but careful planning and consultation with a financial advisor is necessary.
Effective inheritance tax planning involves understanding various rules and strategies, such as gifting and trusts, to minimize tax liabilities. For gifting, HMRC has a simple form to help identify qualifying expenses, and gifts made more than 7 years ago are no longer subject to inheritance tax. The nil rate band is £325,000, and gifting more than that amount may result in immediate inheritance tax at 20%, with potential taper relief after 4 years. Trusts can be used to manage assets and reduce inheritance tax exposure, but they come with complex rules. Setting up a trust for someone other than yourself or your spouse can help avoid inheritance tax, but it's essential to understand that the settlor cannot benefit from the trust for it to qualify for the inheritance tax benefit. Gifting a property to a trust typically requires the settlor to pay rent to continue living there, and placing a home into trust to cover care home costs may not be effective due to potential tax consequences. Overall, it's crucial to consult with a financial advisor to navigate the complexities of inheritance tax planning.
Avoiding care home fees and inheritance tax: Attempting to use trusts or transfer assets to avoid care home fees and inheritance tax can be costly, difficult, and potentially illegal. Approved options include discretionary trusts within a will for disabled young persons and leaving a pension untouched. Court approval may be necessary for inheritance tax planning involving a parent with dementia.
Trying to use trusts or transfer assets to avoid care home fees and inheritance tax can be costly, difficult, and potentially not legal. The local authority is aware of such tactics and will seek to recover the value of the estate. For a disabled young person, a discretionary trust within a will can be a good option to provide for their future needs. Regarding pensions, leaving it untouched in a pension can help avoid inheritance tax, and the tax rules change when the pension holder dies at 75, affecting the beneficiaries' income tax. When a parent with dementia is involved, any inheritance tax planning should be approved by the Court of Protection, considering the parent's best interests. Lastly, leaving life insurance payouts in trust for young children can impact tax and assets, and the beneficiaries can take what is left in the trust.
Life Insurance Trusts: Writing a life insurance policy into a trust can exempt the proceeds from inheritance tax, allowing the beneficiary to receive the gain without paying tax on it
If you have a life insurance policy written into a trust, it is considered an asset outside of your estate for inheritance tax purposes. This means that there should not be any inheritance tax on the value of the policy when it is paid out. The importance of writing your life insurance policy in trust is that it allows the beneficiary to receive the gain without having to pay tax on it because they are not inheriting the asset. It's like buying a policy for someone else. Overall, this discussion emphasizes the significance of trusts in managing your assets and minimizing inheritance tax. If you don't write your life insurance policy in trust, the proceeds will be considered part of your estate and may be subject to inheritance tax. Always consult with a tax adviser or solicitor for personalized advice.