Understandably, it can be very upsetting to think about how your loved ones will react when you are no longer here. But by considering the financial complexities that may arise, you could put meaningful plans in place that reduce some of the burden. Dealing with a deceased’s affairs can be complex and potentially very expensive. The executor of your estate – usually a family member – will have to apply for special legal authority (probate). Amongst the range of responsibilities, they’ll have to find all your financial documentations, send death certificates to organisations who hold your money, pay off any debts you have, follow the instructions of any will in place, and work out whether your estate has an inheritance tax liability.
The last point is especially important. If the value of all your possessions is above your individual threshold – £325,000 if you’re single or divorced, or up to £650,000 if you’re married or widowed – everything above it will be subject to inheritance tax, charged at 40%. The gradual roll out-of a residence nil rate band – worth £125,000 for the 2018/19 tax year – can help you leave a property you have lived in to a direct descendent. However, not everyone can benefit from this additional allowance.
Although these threshold amounts seem high, it might surprise you how much your estate is actually worth. Your estate includes everything you own – property, cars, jewellery, savings, investments and even antiques.
A growing issue
The amount of annual revenue the government has raised through inheritance tax has more than doubled since the 2009/10 tax year – with a record high of £5.2 billion collected in 2017/18 *. The Office for Budget Responsibility forecasts further significant increases in revenue over the next few years. When you die, the executor of your estate will be tasked with providing accurate information on the value of your possessions, and they’ll need to get it right. HMRC will carefully examine the calculations and has shown it’s prepared to challenge valuations.**
Even with recent record inheritance tax intakes, HMRC has revealed there’s a £600 million shortfall between what it collected and what it believes it’s owed. If your estate has an inheritance tax liability, in most cases your loved ones will have six months to find the money to pay it, or interest is charged on top. The estate usually can’t be released until inheritance tax is paid. So it could cause a lot of headaches and frustrations for your family, if they have to deal with an inheritance tax bill.
What are your options?
With inheritance tax bills typically running to thousands of pounds, it makes sense to consider it as part of your planning. With the right plans in place, you could reduce or even eliminate a liability. By speaking to a financial adviser, you can benefit from an expert helping you build the kind of legacy you want to leave behind, whilst minimising any burden on loved ones. This includes looking at whether inheritance tax is something you need to plan for.
Levels and bases of and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate taxation & trust advice.