There is a secret about Inheritance Tax planning that the UK government doesn’t want you to know! With house prices increasing, more and more hard working UK families are having to pay onerous tax bills as a result of the death of a loved one. In fact, the Office for National Statistics show that the final Inheritance Tax bill in 2015/16 is expected to be £4.6 Billion compared to £3.8 Billion in 2014/15 with each family paying an average of £236,000 on the estate of the deceased.

And with that amount of money flowing into the government’s coffers, it’s no wonder they don’t want anyone to know how to lessen the impact of this tax. First, let’s first take a look at the tax itself.

What is Inheritance Tax?

Inheritance Tax stemmed from the influence of the French Revolution whose instigators understood that most wealth was merely passed down through generations of already well off families, leaving the poor excluded. The idea was to tax and redistribute some of this wealth to the less well off and the UK picked up this idea, introducing the tax in 1796.

However, with property often forming the bulk of an estate, combined with the vast increase in house prices during the last 50 years, many more average income UK families are finding themselves liable for Inheritance Tax. Not only are people being caught by a tax originally designed for the super rich, there are a further 2 major contentious points around this tax:

1. A person pays income tax throughout their lives and purchases assets eg, a house, using their nett income. When they die, they are taxed again through the Inheritance Tax laws.
2. When a person dies, Inheritance Tax is applied to the estate on assets over the nil rate band; anything left over after that, is passed to beneficiaries. When that person dies, they are also subject to Inheritance Tax meaning the tax can be applied over and over again throughout the generations.

How Does Inheritance Tax Work?

Put simply, you pay 40% tax on any assets above the nil rate band, which is currently £325,000.

Example:

Mr Smith dies leaving an estate valued at £1million. He has made no tax planning whatsoever and has one daughter.

£325,000 of that estate will not be taxed leaving £675,000 available to be taxed at 40%

That’s a tax bill of £270,000

Once the tax is paid, the daughter inherits £730,000.

The problems is, the daughter’s estate has now increased in value. If she already has assets of £325,000 and you add the £730,000 she has just inherited, her estate is now worth £1,055,000.

When she dies, £325,000 of the estate will not be taxed leaving £730,000 to be taxed at 40%

That’s another tax bill of £292,000.

In just 2 generations, there has been an Inheritance Tax bill of £562,000. More than half of the original estate.

Can you see why the government wouldn’t want you to know that there are ways to mitigate this liability?

How Can Know Your Options Help?

At Know Your Options, we can give you the information you need to plan for a better Inheritance Tax outcome for your family. We help you to understand how your specific family circumstances will affect your tax bill and will help you navigate the system to achieve the optimum outcome.

We offer a no obligation meeting designed to help you understand where your financial strengths are as well as giving an insight into your vulnerabilities. We explain how the use of wills and trusts can channel the money to the people you want to benefit as opposed to it going to the UK government. From there, it’s up to you if you want to take further action.

Call us on 0800 689 3238 or email info@know-your-options.co.uk