Inheritance Tax receipts reach £6.1bn

What if I could make my wealth more tax-efficient?

We all want to leave a legacy and make sure the ones we care about most are well taken care of when we’re gone. That’s why making plans for Inheritance Tax is so important, to have confidence that your children, grandchildren and those you hold dearest will be taken care of long into the future.

Inheritance Tax is a tax on the estate of someone who has passed away. The standard Inheritance Tax rate is 40% in the current 2022/23 tax year. Your estate consists of everything you own. This includes savings, investments, property, life insurance payouts (not written in an appropriate trust) and personal possessions. Your debts and liabilities are then subtracted from the total value of your assets.

Passing on your main residence to direct relatives

Every person in the UK currently has an Inheritance Tax allowance of £325,000 (frozen until April 2026). This is known as the nil-rate band (NRB). In 2017, an extra allowance was introduced to make it easier to pass on your main residence to direct relatives (i.e. a child or grandchild) without incurring Inheritance Tax. This allowance is currently £175,000, known as the residence nil-rate band (RNRB), and is on top of the standard nil-rate band of £325,000.

A tapered withdrawal applies to the RNRB when the overall value of an estate exceeds £2 million. The withdrawal rate is £1 for every £2 over the £2 million threshold.

Allowed to use both tax-free allowances

If you are married or in a registered civil partnership, you are allowed to pass on your assets to your partner Inheritance Tax-free in most cases. The surviving partner is then allowed to use both tax-free allowances. Provided the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an Inheritance Tax allowance of £650,000 (£1 million if they are eligible for the RNRB).

According to recent figures released by HM Revenue & Customs (HMRC), more estates in the UK are now paying Inheritance Tax than ever before[1].

Paying Inheritance Tax unexpectedly

Inheritance Tax receipts totalled £6.1 billion in the 2021/2022 tax year, up £729 million on the year prior. This 14% increase marks the largest single-year rise in Inheritance Tax receipts since the 2015/2016 tax year. The increase is the result of the ongoing freeze on the nil-rate Inheritance Tax band and residence nil-rate Inheritance Tax band.

Many more families are finding the total value of their estate – driven by a rapid growth in house prices, savings and other assets – is likely to be above £1million at the point of death, meaning many more estates could end up having to pay Inheritance Tax unexpectedly.

Start conversations with your loved ones

In the 2019/20 tax year, there were 23,000 such deaths, up 4% on the year prior[1]. Given this data only covers to the start of the pandemic, this number is likely to have risen considerably over the past couple of years as asset prices grew.

With many more estates likely to be subject to an Inheritance Tax bill, it remains important that you have a conversation with your loved ones sooner rather than later so that you all fully understand your estate, the value of it and the potential to pay an Inheritance Tax bill.

Save your family thousands of pounds

When discussing your Will and any potential Inheritance Tax liability, there are things that can be put into place to mitigate or reduce a future payment.
That’s why planning for Inheritance Tax is a fundamental part of financial planning. It could potentially save your family thousands of pounds in Inheritance Tax payments when you die and ensure that your wealth is preserved for future generations.

Source data:

[1] https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritance-tax-statistics-commentary

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDINGON INDIVIDUAL CIRCUMSTANCES.

Self-employed extremely vulnerable to loss of income

81% aren’t seeking financial advice.

Self-employed people are at risk of financial hardship if they don’t have sufficient provision in place. Without a regular income, it can be difficult to cover expenses and also save for the future. In many cases, the self-employed are unable to claim for many of the benefits that employees are entitled to, including statutory sick pay.

Being self-employed also means you don’t have the luxury of having an employer to rely on for sickness cover or health insurance, which can make you extremely vulnerable to loss of income or unexpected financial shocks.

Without a regular income

So if you’re self-employed, it’s essential you’re prepared for anything by having the right protection in place. According to new research, over half (57%) of self-employed workers in the UK rely on personal savings when they are not working, yet a worrying 81% aren’t seeking financial advice[1].

Being self-employed can offer numerous benefits, such as flexible hours and the opportunity to work with a wide range of people, but self-employed workers can also face financial vulnerability. Over two-thirds (64%) of those who are self-employed in the UK revealed they are without a regular income, with just one in five (23%) receiving a monthly pay packet.

Owning a business

The research also found that almost half (48%) of self-employed people see their income fluctuate as a result of owning their own business, with a similar proportion (49%) putting this down to being a freelancer, contractor or consultant.

As the cost of living rises and private rents in the UK increase at the fastest rate in five years, a quarter (24%) of those surveyed said they only had enough money to cover such costs for three months if they were unable to work.

Vulnerability to financial shocks

With the research highlighting the group’s vulnerability to financial shocks and the importance of expert financial advice, one in three (31%) of those surveyed don’t think they can afford professional advice, while one-quarter (24%) say they hadn’t thought about seeking professional financial advice.
Not being eligible for Statutory Sick Pay (SSP) can prove a real problem for the self-employed and their financial resilience – during the pandemic, a fifth (21%) of all applications to the Test and Trace Support Payment scheme were from this group, according to a Freedom of Information request by The Community Union.

Secure financial protection

And while many have taken steps to secure financial protection for themselves and their families, 13% of self-employed workers in the UK still don’t have critical illness cover or life insurance.

Of these respondents, just under a third (31%) said these forms of protection aren’t a financial priority, one in four (25%) said they were prepared to risk not being covered, while a similar amount said they didn’t require these policies (27%) or couldn’t afford them (24%).

Source data:

[1] The research was carried out online by Opinium Research across a total of 2,002 UK adults (Booster sample of 502 self-employed workers and 1,015 Renters). Fieldwork was carried out between 21–27 October 2021.

How to reduce Inheritance Tax by leaving a gift

Planning for your wealth preservation and the eventual transfer of that wealth.

When you’ve worked hard and invested carefully to build your wealth, you want to look after it. That’s why it’s important to plan for your wealth preservation and the eventual transfer of that wealth.

If you’re considering making a gift to someone, there are a few things you need to know about Inheritance Tax. Gifts can be a great way to reduce the amount of Inheritance Tax that your family will have to pay when you die, but there are some rules that you need to follow.

Make use of the annual exemption

Inheritance Tax is a tax that is levied on the estate of a person who has died. The estate is the value of all the property and assets that the person owned at the time of their death. Inheritance Tax is charged at 40% (tax year 2022/23 – a UK tax year runs from 6 April to the following 5 April) on anything above the Inheritance Tax threshold, which is currently £325,000.

There are some gifts that are exempt from Inheritance Tax, such as gifts to your spouse or registered civil partner, or gifts to charities. However, you can also reduce the amount of Inheritance Tax that your family may have to pay by making use of the annual exemption and also carrying forward any unused annual exemption from the previous year.

Avoid paying Inheritance Tax

If you’re thinking about making a gift, there are a few things you need to bear in mind. Firstly, you need to make sure that the gift is genuine and that you’re not just trying to avoid paying Inheritance Tax. Secondly, you need to consider whether the person you’re giving the gift to can afford to pay any Inheritance Tax that might be due on it. And finally, you need to think about what will happen to the asset after you die.

You can make exempt gifts of up to £250 as long as each gift goes to a different person and it’s the only exempt gift they’ve had from you in that tax year. This will commonly include birthday and Christmas gifts given from your regular income.

Money or items of property

A wedding gift from a parent to their child of up to £5,000, from grandparent to grandchild of up to £2,500, or up to £1,000 to someone else, is also exempt.

In addition, each tax year you have what’s known as an annual exemption. Under this you can give away money or items of property to the value of £3,000. This can all go to one person or be shared between several people. And if you didn’t use that exemption in the previous tax year, you can use it in the current tax year and give away £6,000.

Making regular payments

Known as ‘normal expenditure out of excess income,’ you’re able to make regular payments from income you don’t need to maintain your normal standard of living. For example, if you wanted to pay a loved one’s rent or mortgage, or make regular payments into a savings account for your grandchild.

There isn’t a limit on how much you can give away and, like the exempt gifts above, the amount you gift will leave your estate straightaway. But you must be able to afford the payments after your regular living costs and without having to cut back. Plus the payments need to come from your normal monthly income.
Working out if there’s tax to pay

If you wanted, you could combine regular payments with your annual exemption in the same tax year so that one person can receive even more. It’s important to carefully consider how much you can afford – although you may not need the money now, your circumstances in the future could change.

Keeping a record of the gifts you give is essential. It helps you show which are exempt and which may have to be included as part of your estate. And in the event of your death, it will also help those responsible for the administration of your estate when it comes to claiming any allowances and working out if there’s tax to pay.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS.

ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

Tips for a healthy pension as you approach retirement

What really important retirement questions should you be asking?

As you approach the last five years before your retirement, there will be a lot of things to consider. You’ll need to think about your finances, your health, your housing situation, and your plans for the future to live comfortably in retirement.

There will be lots of questions to ask: How much money will I need to have saved? What will my income sources be in retirement? What kind of lifestyle do I want in retirement? What are will my health care needs be in retirement? What are my long-term care needs in retirement? What are my estate planning needs in retirement? What are my tax considerations in retirement?

There are also a number of things to review in order to ensure you have a comfortable and enjoyable retirement.

Things you might want to consider as your retirement approaches. Here are just a few:

Track down your pensions

There are a number of ways you can track down a pension in the UK. But the most straight forward is to use the Governments Pension Tracing
Service to help you find lost pensions – visit: https://www.gov.uk/find-pension-contact-details.

The most important thing is to keep good records and to know where your pension money is invested. If you have moved jobs or changed address, update your records with your current contact details. This will help ensure that you receive any correspondence relating to your pension.

When can you access your pension/s?

The earliest you can currently access your UK pension is age 55 (this will be changing to age 57 in 2028). However, this does not mean you automatically receive your pension at this age – it simply means that you can start to take benefits if you wish. The exact amount and how often you receive your pension payments will depend on the rules of the specific scheme you’re in.

For workplace and personal pensions, there’s no set retirement age, so it’s down to the rules of the individual scheme. Some schemes may require you to retire at a certain age, while others may give you the flexibility to carry on working for as long as you want. The decision of when to take your pension is a personal one, and will depend on your individual circumstances.

What’s your pension’s value?

There are many benefits to checking your UK pension’s value regularly as you approach retirement. By doing so, you can ensure that your pension remains on track to providing you with the income you will eventually want in retirement.

By keeping track of your pension’s value, you can be sure that you are making the most of your investment and are keeping an eye on any changes in the value of your retirement fund. This is important because it will help you identify want adjustments, if any, need to be made to your retirement plans.

Get a state pension forecast

A state pension forecast gives you an estimate of the amount of money you will receive from the Government once you reach retirement age. To obtain your forecast you can do this online through the Government’s website, visit; https://www.gov.uk/check-state-pension. When requesting your forecast, you will need to provide personal information, such as your date of birth and National Insurance number.

Once you have received your forecast, it is important to keep in mind that the amount stated is only an estimate. The actual amount you receive may be higher or lower than what is indicated on your forecast, depending on a number of factors.

Find out the value of your other investments

You need to obtain an accurate estimate of the value of your other investments when planning for retirement. These will play a role in how much money you’ll need to withdraw from your retirement accounts each year. If you have a large investment portfolio, you may be able to withdraw less each year, which could help stretch your retirement savings further.

The value of your other investments are likely to impact on how much income you’ll need to generate from them in order to meet your retirement expenses. If you have a more modest portfolio, you may need to withdraw more each year in order to cover your costs. Knowing the value will enable you to determine whether you’re on track to reaching your retirement goals. If your portfolio is worth less than you had hoped, you may need to make adjustments to your savings and investment strategy in order to realign your retirement plans.

How will you access your pension?

If you have a UK Defined Contribution pension, you may be able to take some or all of your pension benefits as a lump sum from age 55 (age 57 in 2028). This is known as ‘pension unlocking.’ You can take up to one-quarter of your pension pot as a tax-free lump sum. The remaining balance can be used to provide an income for life.
However, there are some things you should bear in mind before taking this step. Taking your pension benefits as a lump sum will mean that you will have less money to live on in retirement. This is because the lump sum will be subject to income tax and by taking your pension benefits as a lump sum may also affect your entitlement to certain state benefits, such as the State Pension.

Make a retirement budget

It’s no secret that retirement can be expensive, especially with the effects of rising inflation. In addition to the obvious costs, like housing and healthcare, there are a myriad of other expenses that can quickly add up. From travel and leisure to groceries and utilities, retirees have plenty of bills to pay. That’s why it’s so important to create a retirement budget. By understanding where your money is going you can identify potential areas of improvement.

A retirement budget doesn’t have to be complicated. But it should include all of your expected sources of income, as well as all of your anticipated expenses. Once you have a clear picture of your cash flow, you can start making adjustments to ensure you can look forward to enjoying your retirement years.

A PENSION IS A LONG-TERM INVESTMENT NOT NORMALLY ACCESSIBLE UNTIL AGE 55 (57 FROM APRIL 2028 UNLESS PLAN HAS A PROTECTED PENSION AGE). THE VALUE OF YOUR INVESTMENTS (AND ANY INCOME FROM THEM) CAN GO DOWN AS WELL AS UP WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY THE INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS.

THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION WHICH ARE SUBJECT TO CHANGE IN THE FUTURE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

call: 01422 349 131

email: info@iftwm.com

Month: September 2022