Brits paying £530m more than they should in inheritance tax
That sum has increased by £58 million, or 12%, compared to last year, analysis by IFA network unbiased.co.uk has found.
While life insurance policies are usually free from IHT, if the payout takes your estate to a value of more than the nil-rate band (the 'tax free' limit set by the government) of £325,000, a tax levy of 40% will apply to the payout.
This means that by not putting the policy under trust, a £100,000 life insurance payout could be reduced by £40,000 should someone's estate exceed the nil rate band.
With the average UK house price hovering around £188,000 by the end of the second quarter of 2014, and around £400,000 in London, increasing numbers of homeowners will find themselves nearing or exceeding the nil-rate band.
Sizeable tax bill
Karen Barrett, chief executive of unbiased.co.uk, said: "Many of us want to pass on our estate to loved ones after we're gone but what people don't realise is the sizeable tax bill we might also be handing over in the process. As the housing market continues to boom and the IHT threshold remains static, this leaves many more of us at risk of passing on an unnecessary tax bill.
"Planning ahead can mean your beneficiaries don't pay more tax than they need to as there are many strategies for reducing an inheritance tax bill including wills, pensions, trusts and other tax advice."
Unbiased.co.uk and life insurer Prudential say anyone getting to grips with IHT planning should bear the following in mind:
- The rate of IHT tax can be reduced to 36% if you leave 10% of your net estate to charity.
- Married couples and civil partners can increase the threshold on their estate to as much as £650,000 - available on the death of the surviving partner.
- Transfer of property between married couples or civil partners is completely free from inheritance tax.
Generally thought of as being interchangeable with life assurance, but isn’t. Life insurance insures you for a specific period of time, at a premium fixed by your age, health and the amount the life is insured for. If you die while the policy is in force, the insurance company pays the claim. However, if you survive to the end of the term or cease paying the premiums, the policy is finished and has no remaining value whatsoever as it only has any value if you have a claim. For this reason, life insurance is much cheaper than life assurance (also called whole of life).
The tax levied on the total value of your estate after you die. IHT has to be paid by the beneficiaries of your estate before they can receive any of the money from it. The money can’t be taken from the value of the estate _– it has to be paid before any money can be released. There is an IHT threshold – known as the “nil-rate band” – below which no tax is levied (£325,000 in 2011/12). Any amount above the nil-rate band is subject to tax at 40%. If your estate totals £600,000, there is no tax on the first £325,000; however your estate will pay 40% tax on the remaining £275,000, a total of £110,000. Prudent tax planning can reduce your IHT liability, so always consult a specialist solicitor.
A financial adviser who is not tied to any financial services company (such as a bank or insurance company) and is authorised by the Financial Services Authority (FSA). They can advise on financial products to suit your circumstances. All IFAs have to give consumers the choice of paying by fees or commission and have to explain which would best suit the customer in that particular instance. Also, if commission is paid either by the client or the financial service provider recommended by the IFA, the IFA must disclose what that commission is.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.