Let’s talk about Inheritance Tax…the ticking time bomb, caused by your own success!
We all know that when you have money, you need to pay tax on it. Depending on the structure of your business, this is usually a combination of corporation tax on your business profits, personal tax on any salary and dividends that you pull out of your business, and then tax like VAT on things that we buy.
But have you started thinking about Inheritance Tax?
As a woman in your 30s or 40s, it’s completely understandable if it’s never really been a priority, because it feels like something that’s a long time away (and of course, let’s hope it is!). But actually, it is a tax that needs to be thought about sooner rather than later, as I’ll explain here.
There’s a great quote from Roy Jenkins, who was Chancellor of the Exchequer back in the 1960s. He described Inheritance Tax as “a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”. Which just about sums it up!
So what do we mean by Inheritance Tax (IHT)?
IHT or death duties is the money that your estate pays, on the money they inherit.
We all have allowances as to how much we’re allowed to pass on and who to without paying tax – but for lots of successful business owners, it’s something we really do need to pay careful attention to.
Why? Because 40% of what you leave to your loved ones over the IHT threshold, they are going to lose in tax. 40% of the money and wealth you’ve worked so hard to build. Which is just huge, isn’t it?
This is why IHT planning is so very important. It’s about getting things in place now, that can mean your family pay a lot less in tax and end up with more of your legacy in their pocket, which I’m pretty sure is what we all want.
So what are the key things to consider?
Well – Inheritance Tax follows on from writing a Will, which is one of the most important pieces of paperwork you can ever have. Seriously. I’ve written other blogs about Wills too (which you can find here on the website) but if you don’t have a Will in place, please click here to book a Will appointment ASAP. I know it’s easy to keep putting off but honestly, I can’t stress how important it is!
Even when you’ve got a Will and you’ve specified who is to get your stuff when the time comes, they’ll be responsible for filling out a tax return on behalf of your estate. Your estate is simply everything that you own.
Everyone is allowed to leave £325,000 worth of stuff to their heirs, without paying any Inheritance Tax. If you’re leaving your house to your children or your grandchildren, you get an additional allowance which pushes that up to £500,000. But if your estate is worth more than £500,000, anything over that potentially is liable to IHT at 40%.
It doesn’t always have to be as bad as this because if you’re married and one of the spouses dies first, the other person can inherit their allowances. If you’re leaving everything to your kids, this means that for some families who are married with children, they can have an estate worth £1million and not pay any Inheritance Tax.
But of course, not everyone’s married (or still married). If you’re not married – and certainly if you’re not married and you don’t have children – your limit is just £325,000.
When we look at house prices and the value of people’s savings, investments and business assets, it’s easy to see how you can quickly go over this figure. So I’m going to give you 3 quick things to think about, to see if we can find a way to minimise the IHT that’ll need to be paid!
STEP #1: GET CLEAR ON YOUR INHERITANCE TAX POSITION
This means looking at your assets, making sure you know how much they are and whether they are going to be over the IHT threshold or not.
When I track this every month with my Asset Accelerator™ and Magnetic Wealth™ clients, we’re looking at the size of your assets and your net worth figure (not least to make sure it’s going up, month by month!). But if you don’t regularly check this, it’s time for you to do a snapshot:
- What is your house worth?
- How much do you have in savings?
- What are your investments and ISAs worth?
- And any other assets you own?
(Pensions usually fall outside of IHT by the way, because they’re in a protective trust wrapper, so you don’t normally need to think about them at this stage. But we’ll talk about that in more depth at another time!).
When you add up the value of these things – including all the money in your bank account and your business bank account – have you got more than £325,000 worth of assets? And if the answer is yes, then whoever you leave your estate to is going to have some Inheritance Tax to pay.
So what can you do to minimise it?
STEP #2: MINIMISE THE INHERITANCE TAX YOUR LOVED ONES WILL PAY
Minimising IHT on your estate depends on many factors – like how old you are; what your health is like and how long you have until you retire. But certainly, it’s becoming more and more common for people to think about passing on their assets within their lifetime.
For example, parents often say to me that they want to give some money to their children now, to help them get on the property ladder or reduce their mortgage or buy a bigger house. They don’t want their children to have to wait until they’re gone to inherit the money.
The good thing about this is that when you give that money away during your lifetime, there’s no Inheritance Tax to pay, providing at least seven years have passed before the person giving it away has died.
But of course, if you give away all your money too soon, you could well end up with not enough to live on in your later years! So it’s about getting clear on whether gifting could be a good way forward for you and if so, to what extent.
As part of this, you can look at gifting into protective trusts. Gifting into a trust can mean that the money is outside of your estate within seven years and can keep the growth within the investment out of your estate too. This can be great as part of your IHT planning but again, by putting money into the trust, you will often then be restricted as to whether you get access to this money again, should you need it to live on later.
Some trusts can be set up to allow you access to some or all of the money under specified conditions. But if you choose to go down this route, it’s really important that it’s set up properly – because putting the money into a trust where you can’t access it or benefit from it should you need to, is no better than giving away the money as a one-off gift!
STEP #3: THINK ABOUT INSURING YOUR HEIRS AGAINST A MASSIVE TAX BILL
If you know you’re going to leave behind an Inheritance Tax bill – because it’s going to be your children or heirs that pay, rather than you – you could set up some life cover on a specific Whole of Life policy, to cover it.
Think of it like the state insuring itself! So in effect when you die, the policy will pay out and give your family a lump sum of money to pay the IHT that’s due.
This type of insurance cover is not cheap, usually several thousand pounds a year. Why would you want to do it?
Well – the biggest thing about Inheritance Tax is that your heirs will have to pay the whole IHT bill BEFORE probate is granted.
Let’s say your whole estate is worth £1million. It’s incredible for you to leave such a wonderful legacy to your heirs. But if £500,000 of that is liable to IHT, there’s going to be a bill of £200,000 worth of Inheritance Tax to pay – and they’ll need to pay the whole £200,000 bill before they get granted probate. Before they can access or sell any property or assets, to release any money.
So unless your children or heirs are likely to have a spare £200,000 to pay your Inheritance Tax bill, it may well make sense to arrange some sort of insurance to cover this cost!
I guess the real point I want to leave you with today is that like most things when it comes to your finances, Inheritance Tax is something you need to look at regularly. I’m not saying you have to bottom out your whole plan for it now – but it at least makes sense to be aware of what might happen in the future, so you can bear this in mind with your planning.
It might be that over a period of time, say five to ten years, you start to gift money from your estate. It might mean you go shopping or on a round-the-world trip and you spend it. After all, spending the money is one way to not have to pay tax on it!
And of course there are investments you can use to reduce your IHT liability, but these are all specialist investments and you should absolutely speak to a financial advisor before getting involved with this type of investing.
Inheritance Tax planning is one of the key things that we cover as part of Magnetic Wealth™. It’s my signature 12-month asset mastery programme, where we work together 1:1 to create a plan that enables you to live a wealthy life now AND have money for your future financial security, and to leave your assets to those you choose in the most tax-efficient way possible.
If you want to find out more about Magnetic Wealth™ and whether it might be right for you, you can check out all the details here now or just send me a personal message here to chat through all the options.
And if you are that 30- or 40-something whose parents are starting to talk about gifting some of their money to you, do get in touch as well and we can chat through our Intergenerational Wealth Review Service!
Until next time,
Claire