Paying tax on death is one of the most frustrating taxes of all to pay but fear not, there is a way around Inheritance Tax which is legal and provides fantastic benefits to the ones you leave behind.
So you pay tax on anything you earn, when you want to buy a house, on most goods and services you buy, when you make a large gain from investments and yet still the government want more when you die! The biggest problem with Inheritance Tax is that you don’t actually pay it, you’re dead when this happens remember! So who does pay it? Well it’s actually your beneficiaries, perhaps your partner or children. But worse still, they need to pay the Inheritance Tax bill before they can access their inheritance. This can leave a lot of families in a desperate and stressful situation. I once had the experience of meeting a new wealthy client whose husband had just died. Unfortunately all their money was tied up in various investments that were not easily accessible for a few weeks and she didn’t have enough money to pay for the funeral!
Do I need to find a way around Inheritance Tax?
Now Inheritance Tax won’t be paid by everyone. You need to be worth more than £325,000 (known as the Nil Rate Band allowance) if single and more than £650,000 if married or in a civil partnership. There are also other allowances available for gifting and if you own your own home. You can find out more information on the government’s website or ask us a question if unsure.
If you are in the position of having to pay Inheritance Tax on your death the amount will be 40% of anything you own above any allowances you are entitled to. That’s nearly half your wealth!
Unfortunately more and more of us will be paying Inheritance Tax on our deaths as allowances remain fixed and our property and investments grow in value.
But I want to share with you a really simple way around Inheritance Tax.
A simple way around Inheritance Tax
This is not some complex dodgy offshore Trust fund. No, a simple way around Inheritance Tax is to use your pension. When I say pension I mean money purchase pensions, the type you pay into and has a value, not final salary pensions.
Since George Osborne announced ‘pension freedom’ rules in 2014, the flexibility and usefulness of pensions has grown massively.
Pensions can be disregarded from the calculations when adding up the value of your estate for Inheritance Tax.
If you die before age 75 you can leave your pension to which person or persons you like and they will be able to take it all out as a lump sum or can use it as their own pension. The best bit is that it is completely tax free for them.
If you die after age 75 then you can still leave it to whoever you like and that person or persons can still take a lump sum or income however the difference here is they will pay Income Tax at their marginal rate. So not as generous the longer you live but still far better than paying 40% Inheritance Tax and if you leave your pension to young children after age 75 they are unlikely to be paying any tax at that point.
You can even leave your pension to your partner and if they don’t use it they could then leave it and pass it down to children.
The key is to make sure you have completed a death benefit nomination form for your pension. So you can document who you would like to benefit from your pension after you have gone.
So a fantastic way around Inheritance Tax. There is just one caveat, if you transfer your pension whilst suffering ill health and then die within 2 years then your pension may be subject to Inheritance Tax. If you are in this situation please check with us first.