FINANCE & LAW
Understanding new inheritance taxes
Although perhaps a difficult area for discussion, irrespective of your age or stage of life, it is never too early to ‘put your house in order’ and organise your financial assets to minimise inheri- tance tax, and reduce the burden for your loved ones upon your death.
The introduction of the new residence nil rate band (RNRB) has generated a lot of discussion, and for many couples will sig- nificantly reduce the tax payable on death making it easier to pass on the family home to direct descendants, if certain criteria are met.
Married couples from 2020-21 can leave £1m free of inheri- tance tax to children (children being not only those of direct descent but also step-children, adopted children or foster chil- dren), an increase of £175,000 per person in the current rules. As with the ordinary nil rate band, the allowance is transferable even from a spouse or civil partner who died before its intro- duction. The tax relief is not however straightforward to claim and will not be available to anyone who has an estate valued at more than £2.2m or who has had neither residence nor chil- dren. Those with more than one residential property will be able to nominate a property to qualify, but this must have been a residence of the deceased and therefore assets such as buy- to-let property would not qualify.
If you are able to maximise your pension fund you can pass free of inheritance tax up to a further £2.5m, regardless of the size of your estate and regardless whether the beneficiary is a child.
Pension planning is now a vital part of overall estate planning, and action is needed to ensure that you pass on any pension as- sets to the people you want to benefit. The funds will not auto- matically be passed to your executors to pay to the beneficiaries named in your will. Instead you will need to make a nomination to the pension provider, who will provide a form specifically for this purpose.
To maximise the tax-free amount, you will need to draw your retirement living expenses primarily from your non-pension as- sets to reduce your estate as much as possible. The aim would be down towards the £2m mark to enable you to take the maximum advantage of the RNRB, and leave the maximum funds possible in your pension. This reduces tax payable on your estate and increases your overall tax free allowances. This in it- self may need planning to minimise capital gains tax.
A final benefit to your family is that if you were to die under the age of 75, the beneficiaries of your pension fund will inherit not only free of inheritance tax but also of income tax, maximising benefit to your loved ones.
So review, and if necessary revise your will, make any gifts you can to start the seven years running, ensure your pension fund nominations are in place, then sit back and enjoy living.
Pension planning is now a vital part of overall estate planning, and action is needed
to ensure that you pass on any pension assets to the people you want to benefit.
32 FOCUS The Magazine November/December 2017
For more information on issues discussed in this article, please contact Mary Hase, Director, Private Client team at Buzzacott, on
hasem@buzzacott.co.uk or +44 20 7556 1328.
www.focus-info.org
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