A Loving Legacy: Planning Pointers for Lowering Your Inheritance Tax Bill

Editor’s Note: This post is oriented toward UK readers, so those of us here in the US should consider our own inheritance tax issues and rules separately

Most of us want to make sure that our loved ones that we leave behind are taken care of financially if we can, yet too many leave it to chance when it comes to tax planning, which could actually leave a legacy that is within the grasp of the taxman.

When it comes to making the most of inheritance tax planning, you have to deal with these issues while you are still very much alive, so that your last wishes can be carried out in the most tax-efficient way possible.

No room for complacency

The fact that the Chancellor George Osborne has very recently announced plans to scrap inheritance tax on homes valued up to £1 million is good news for many of us if that promise to raise the threshold from April 2017 is kept.

Inheritance tax planning is about taking all of your assets into account and making sure that you have a will that directs the appointed executors of your will as to how you want your assets and cash distributed, so you cannot afford to be complacent and think that your estate won’t attract an inheritance tax bill.

Pension changes

There have been some significant changes to personal pension rules recently and from April 2015, savers who are aged 55 and over are able to gain full access to the cash in their pension pot.

Whilst you should definitely take detailed expert advice on this subject when considering your options, these changes do offer a number of tax-planning opportunities as well as some risks that you need to quantify.

In simplistic terms, the new pension rules do offer a significant chance for wealthier investors to legitimately avoid or substantially reduce their inheritance tax bill, provided they follow the professional advice and steps that you need to take in order to take advantage of this scenario.

The pension rules are still complex and your personal financial circumstances do dictate what advice is best for you but basically, the change in rules allow you greater flexibility to re-arrange your assets prioritise your spending, by putting as much money as possible inside your pension as you can, whilst you are able to do so.

Lifetime limit

The current pension rules state that your pension assets can’t exceed £1.25 million within your lifetime and this figure is going to actually drop to £1 million from April 2016.

It is a bit of a balancing act when it comes to funding your pension pot in the most tax-efficient way but the basic target is to try and minimise non-pension assets above the £650,000 current death tax threshold (for couples, and changing to £1 million as proposed by the government).

More people than ever before are using non-pension assets to generate a retirement income, which means that their pension pot could be passed on to your heirs virtually intact and potentially tax-free, if your situation allows you to do this and you take sound professional advice to achieve this goal.

As the old business adage goes, if you fail to plan, you plan to fail. This is not something you want to do if you intend to leave a loving legacy.

Richard Hardy has held a number of senior roles in relation to tax planning. He is passionate about sharing his suggestions and tips on this subject with a wider audience online. He has already written a number of articles which have appeared on other relevant websites.

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