‘Important’ inheritance tax guidelines for married {couples}
From pensions and ISAs to property, the ‘important’ IHT guidelines for married {couples} (Image: GETTY)
Amid exponential price rises within the UK, frozen inheritance tax thresholds proceed to push regular households into the 40 % tax bracket.
This has left many in search of tax-efficient methods to handle their funds higher, so as to beat a hefty inheritance tax invoice in later life.
Rules differ relying on the beneficiary, nonetheless, married {couples} have just a few further tax benefits – and it might pay to know what these are.
Express.co.uk spoke to inheritance tax specialists to seek out out the principles round thresholds and gifting to ISAs and pensions – together with the highest tricks to maximise tax effectivity.
Tom Trewby, senior tax supervisor at Mazars instructed Express.co.uk: “Inheritance tax (IHT) was once regarded as a tax that only affected Ultra-High-Net-Worth Individuals (UHNWIs). However, rising property prices and frozen allowances mean more are facing a potentially significant tax charge upon death.
READ MORE: The UK area paying more inheritance tax than Wales and Northern Ireland
Both married couples and civil partners can leave their whole estate to their partner tax-free (Image: GETTY)
“Everyone’s circumstances are different, and it is important that even those who might not consider themselves particularly wealthy get proper tax and financial planning advice.”
What is the inheritance tax threshold for married {couples}?
Ivana Sidey, solicitor at Birketts mentioned that whereas being married “doesn’t guarantee a happily ever after”, it does imply you’ll be able to say ‘I do’ to a decrease tax invoice.
Ms Sidey mentioned: “Both married couples and civil partners are free to leave their whole estate (money, property and possessions) to their partner when they die, completely free of tax.”
Currently, inheritance tax is charged on an individual’s property if the entire worth exceeds £325,000 (nil-rate band), after which a 40 % tax is utilized on the remaining figures.
However, Ms Sidey famous: “If you take the classic example of a married couple leaving everything to each other, and then leaving everything to their children on the second death, the surviving partner can add the unused £325,000 nil rate band and the £175,000 residence nil rate band to their own allowances.
What is Inheritance Tax?
Inheritance Tax is a tax on the estate (property, money and possessions) of someone who’s died.
There’s usually no Inheritance Tax to pay if either:
• The value of your estate is below the £325,000 threshold you leave everything above the £325,000 threshold to your spouse, civil partner, a charity or a community amateur sports club
• The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
For example:
Your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
Who pays Inheritance Tax?
• Funds from an estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will)
• Beneficiaries generally don’t pay tax on things they inherit. They may have related taxes to pay, for example, if they get rental income from a house left to them in a will.
“This means they can leave an estate of up to £1million to their children before it will be chargeable for IHT – but be aware. You can only transfer your estate free of tax and pass on your allowances to your spouse; cohabiting couples cannot do this.”
Inheriting property from a partner
According to Ms Sidey, there are 3 ways to inherit property. She mentioned: “If you and your spouse own it as joint tenants, it will automatically pass to the survivor, regardless of whether you have a Will.”
She continued: “If the property is owned in your spouse’s sole name, the terms of their Will decides who it passes to. Lastly, if the property is owned as tenants in common, the Will also decides who inherits the property.
“Remember, if you don’t have a Will and don’t own the property as joint tenants, it will be the laws of intestacy rather than you who decides who inherits.”
Ms Sidey reiterated that no IHT is paid on property passing to the surviving partner. In addition, she mentioned: “The assets will receive an uplift for Capital Gains Tax (CGT) purposes. This means on a sale, CGT will only be paid if [assets] have increased in value since the date of death.”
Inheriting ISAs and pensions
When it involves inheriting ISAs and pensions, the IHT Spouse Exemption would additionally apply, as an asset, so no IHT can be payable on the worth of a partner’s ISA.
Mr Trewby added: “You can add the inherited ISA assets to your existing ISAs even if this would exceed the normal ISA allowance.”
This will be completed by means of the Additional Permitted Subscription (APS), which is a particular one-off elevated ISA allowance.
Although Laura Ripley, chartered monetary planner at BRI Wealth Management instructed Express.co.uk : “There is, in fact, no requirement to inherit the ISA assets. Instead, the survivor could use other cash assets to subscribe the value either with the existing ISA manager or to an alternative.
“Continuing ISA rules mean that income and gains remain tax-free during the estate administration period. The ISA can continue until the earliest of the administration of the estate being completed, the ISA is closed, or three years have passed since the date of death. The value used for the APS is either the higher value of the ISA at the date of death or the value of the ISA at the date it ceases to be a continuing ISA.”
Pensions are barely completely different, in line with Mr Trewby, as a pension fund is mostly exempt from IHT.
He defined: “The tax consequences of inheriting a pension will depend on how old your spouse was when they died. If they are under 75, it is generally possible to withdraw the funds tax-free. Otherwise, any withdrawals will be taxable at your marginal rate of income tax.”
Tips to maximise inheritance tax effectivity
With the IHT Spouse Exemption solely “delaying” the purpose at which IHT applies, Mr Trewby mentioned: “It is important that a plan is in place that deals with the second death. Therefore, people with even moderate amounts of wealth should seek joined-up tax and financial planning advice.
The “best” tip to maximise IHT efficiency is to have a professional regularly review finances (Image: Getty)
“This would ensure they are benefiting from all the legitimate ways of reducing their IHT liability, ensuring they can pass as much as possible to their families.”
Ms Sidey advised contemplating organising a belief for the good thing about family members. She defined: “This will remove assets from your estate and will freeze them at today’s price, so any future growth will also be outside of your estate.
“You will need to survive anything you ‘give’ into the trust by seven years for it to be exempt from IHT but there are many different types of trusts and administration involved so specialist advice may be needed.”
Finally, Ms Ripley added: “The best tip to maximise IHT efficiency is to have a financial planner regularly review your finances.
“Your asset values will change but so do the tax rules. Keeping on top of this and understanding your estate position periodically is key. Action won’t be needed in all cases but at least you know where you are and where things might be heading if you use some lifetime financial planning.
“Another essential tip is to not leave it too late. Often people ignore IHT until it is too late to carry out effective planning or this may limit their options.”