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Until death do us part…

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With our worldly goods that is. Following on from my uplifting article on what do to in the event of a death, I now turn our attention to an equally cheerful aspect on a closely related subject – Inheritance Tax (IHT). In the famous words of Benjamin Franklin, “but in this world nothing can be said to be certain, except death and taxes”.

It is said Inheritance tax is really a voluntary tax, indeed, Lord Jenkins said, “Inheritance Tax is a voluntary tax, paid by those who distrust their heirs more than they dislike the Inland Revenue“. Unfortunately it isn’t that simple, however, professional IHT financial planning can often significantly reduce, or even eradicate, a potential IHT liability. First a few facts to prove that IHT is not just an issue for the well-heeled.

According to the Office for Budget Responsibility (OBR) the number of UK families paying IHT on death has reached a 35 year high and estimated to increase further to 45,000 families this financial year, with the main driver of this being the increase in house prices. In 2009/10 only 2.6% of deaths generated an IHT liability, the OBR has predicted IHT will affect 8% of estates this financial year and has predicted that by 2020/21 will generate £5.6 billion for the government.

With IHT payable at the rate of 40% over a threshold of £325,000 (set to remain the same until at least 2019) it is ironic that many basic rate tax payers during life could easily become higher rate tax payers on death. Think about this, if you leave equal shares to just two beneficiaries from a taxable estate (ignoring the threshold), which beneficiary will receive the lion’s share of your estate? Answer: 30% to each of your chosen beneficiaries and 40% to the tax man!

One solution is to give your wealth away and live seven years, but think what would this mean to your financial security? Add in possible care costs into the mix and the situation becomes even more challenging to have your cake and give it away so to speak. You don’t want to be the richest inhabitant in the cemetery or live in penury in your twilight years. Surely there is a compromise to be found? Rest assured there is and it is likely to be different for everyone. Ensuring your own financial security whilst bequeathing a hard earned financial legacy to your family is possible with prudent forward planning; “Death and taxes may be inevitable, but they shouldn’t be related” – J.C. Watts Jr.

Author: Paul Newton FPFS, CertPFS (DM), STEP Affiliate, is a Chartered Financial Planner for Castlegate Financial Management Limited, a firm of Independent Financial Advisers, authorised and regulated by the Financial Conduct Authority. 8 Castlegate Grantham Lincolnshire. 01476 591022. Tax advice is not regulated by the FCA.

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