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Inheritance tax

My thanks go to Abbey Tax for providing this article.

£1m inheritance tax allowance per couple?
One of the more positive things to come out of recent Budgets was that the Conservatives finally made good on their long standing promise to increase the inheritance tax allowances to £500,000 for an individual or to £1m for a couple.

These allowances will be phased in from April 2017 and will come fully into force from April 2020.

So, all good news? Well yes and no!

Of course it is positive that the allowances are going up as they have been frozen now for six years, however there are, as always, a number of caveats and conditions that may catch some people out. For example the increased allowances only apply to people whose total estate, on death, is worth less than £2m.

If an estate is worth more than £2m then the additional allowances are reduced by £1 for every £2 over the threshold such that if the estate is worth £2.75m on death, then clients will only get the old allowance of £650,000 per couple.

Another thing that wasn’t widely publicised is that when calculating whether if a client breaches the £2m limit you must take into account all of their assets, including assets that are already exempt from inheritance tax such as shares in a family trading company.

In summary don’t take for granted that clients will benefit from the new reliefs in full.

If you would like to review your client’s current exposure to inheritance tax please contact us to arrange a meeting.

Case study – inheritance tax, a tale of two families
Imagine two families over the generations: the Smiths and the Jones’.

They are very similar in all respects in terms of their wealth and assets.  However, the thing that sets them apart is that the Smiths never worried about estate planning or inheritance tax, whereas the Jones’ took it seriously.

Mr and Mrs Smith were worth £5m in total and died 30 years ago, they paid £1.75m of inheritance tax and left the remainder £3.25m to their only son John.

When John died his estate, including his inheritance was worth £3.75m and his estate paid £1.2m, leaving approx. £2.5m to his only son.

When the son dies the next generation will inherit approx. £1.8m, not bad, but not great when you consider that the original generation were worth £5m.

Now the Jones’ were much more sensible. The first generation were also worth £5m but they put some planning in place and the estate paid only £50,000 of inheritance tax.

The next generation of Jones’ therefore inherited nearly £5m which they invested sensibly and which grew significantly, not least because they were able to reinvest the £1.75m that otherwise would have been paid to HMRC.

By the time this generation passed away their estate had increased significantly and because they had structured their estate sensibly, so as to minimise inheritance tax, they could pass it down almost wholly intact to the third generation.

Sensible inheritance tax planning for future generations can make a massive difference.

Andy Scott

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