Inheritance Tax (IHT) is a cost that almost all doctors and dentists are conscious of reducing. It is important, understandably, to want to pass on as much wealth to your family and to not see thousands of pounds disappear to the tax man. There are the traditional ways to reduce your IHT. Here we also consider an often overlooked alternative that could suit some.
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it.
IHT – nil rate band
Like most taxes, IHT also has a tax-free element, a limit where tax does not apply. For the 2016/2017 tax year, the nil-rate IHT band is £325,000.
This means that this proportion of your estate is not subject to IHT when you die. Any value higher than this though is taxed at 40 percent (current rate).
Assets in your estate may include property, business shares or ownership of a business – it is basically all your assets, wealth and possessions combined.
For married couples, and civil partners, the surviving partner can inherit the nil-rate band, equating to a total tax-free allowance for IHT purposes of £650,000.
Main Residence – nil rate band
Additionally, there is soon the introduction of the new IHT allowance relating to the main residence, dubbed the “Family Home Allowance”.
From April 2017, if you pass on your main residence to a direct descendent when you die, then further tax-free allowances will become available to you.
This will be phased-in from 2017 to 2020, starting at an additional £100,000, tax-free, and working up to £175,000.
This has been initiated because the government recognised the exponential growth in property prices and the effect it was having on IHT bills.
Reducing IHT – some familiar options
Despite these measures to increase the amount of your estate that untaxed, property prices are escalating at a rapid pace. If you have a high-value house, or property portfolio you could still find you leave your family with a hefty IHT bill.
To reduce your IHT bill, one popular method is to give away your assets to family during your lifetime. For these gifts to be exempt from IHT though you need to survive for 7 years.
Assets held in trust also require 7 years until they are removed from your estate for tax purposes.
However, both of these options require parting with your money, and this may not be suitable for you.
What if you wanted to retain control of your money, have flexibility in case you needed the money later in life, whilst also reducing your tax bill – is this possible?
Business Property Relief reduces IHT in 2 years
Business Property Relief (BPR) involves purchasing shares in trading businesses. These shares can be left to beneficiaries without an IHT implication.
It is less conventional than other routes to reduce IHT, therefore it needs careful consideration by a financial adviser, to ensure it is suitable for you.
Investing in BPR qualifying businesses gives you control of your money and makes the asset tax-free much quicker as shares must be owned for only 2 years before death, to qualify as tax-free.
There is an element of risk involved so it isn’t for everyone. It very much depends on your attitude to investment.
It is a complex area of tax planning too, and there are some costs and charges involved, so it requires research and consideration.
Savings can be great though so if IHT is a concern of yours, speak to a professional to see if it is an option for you.
Inheritance Tax planning can save your family thousands
Dental & Medical Financial Services have been helping doctors and dentists with Inheritance tax planning for over 25 years. Call to discuss your options with Darren:
Tel: 01403 780 770
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