Whether you’re giving or receiving an inheritance, it’s important to get advice as early as possible so you can plan ahead. Tax-efficient financial planning helps to reduce any stress and manage the impact, so you can enjoy any inherited monies. We share some financial advice tips on inheritance to help you prepare in advance and reduce inheritance tax (IHT).
What does inheritance planning involve?
Inheritance planning involves a variety of strategies, from wills and trusts to inheritance tax (IHT) considerations and gifting rules. The main aim is to protect any inherited monies from tax implications, both now and in the future with regards to your estate.
If the value of your estate increases above the nil band rate of £325,000, your family may have to pay 40% IHT on anything above. Properties are included within your estate value, although the nil band rate threshold increases to £500,000 if you pass on your home to a child or grandchild. Therefore, IHT considerations are vital when you receive or pass on a large inheritance.
Whether you choose to spend it, give it away, invest it for the future, or repay outstanding debts is up to you. However, consider carefully how you will use your inheritance in the short term and for any long-term goals. In fact, we often find that receiving an inheritance is the trigger for people to seek independent financial advice.
If the inherited sum is higher than the maximum £85,000 covered by the Financial Services Compensation Scheme, split it between several banks or building societies. This will ensure that if anything were to happen to one of your accounts, then your inherited cash will have some protection.
You might also be invited by your bank or building society to take advice, but this won’t be independent, and these individuals are not tax experts. Always speak to experienced, independent financial planners when you need to discuss your options.
If you have inherited pensions or investments, the solicitor should arrange for these to be put in your name. There’s no rush to do anything straightaway, and until April 2027 there won’t be any IHT payable on an inherited pension.
Why “just having a will” isn’t enough
Many people assume that their estate will be safe simply because they have a will and they have stipulated their wishes. But this isn’t always the case, and there are many factors that can affect an estate, especially if you’ve received a large lump sum.
Firstly, it’s important to make sure you have a legally valid will, which has been witnessed and signed, as well as keeping this up to date. When people remarry, an old will is automatically revoked, which means the new spouse or civil partner will inherit from you.
A common issue is when children from previous marriages or relationships are disinherited, or an ex-partner is named but the deceased never changed their will. When an inheritance is received and you plan to pass this onto your children, it’s worth looking at other protections too. A trust, for example, could help to ensure monies are safeguarded for children as beneficiaries of the trust. There could also be estate tax advantages for using a trust.
Reduce IHT impact of receiving an inheritance
Using tax-efficient, financial planning strategies, you can model the impact of a large gift or a received inheritance. If you plan to give your children or grandchildren part of your inheritance to reduce IHT, then you’ll need to be aware of gifting rules.
You’re allowed to give up to £3,000 worth of gifts each tax year, which can be split between multiple people. Known as your ‘annual exemption’, you can also make unlimited gifts of £250, as long as you haven’t used your allowance on the same person. Outside of this amount, tax won’t be liable on gifts as long as you don’t die within seven years of making the gift. If you did pass away during this time, there is tapered relief for IHT.
in the recent Budget, changes were announced to IHT which also need to be considered. From April 2027, pensions will no longer be exempt from inheritance tax. This means that inheritance tax may have to be paid on your pension when you die. The same IHT threshold will still apply, but according to government figures, it’s estimated that 10,500 estates will pay IHT for the first time. Also, an estimated 38,500 people will pay more IHT than previously.
If you want to avoid mistakes and future tax problems for your estate beneficiaries, consider delegating your inheritance planning to an expert. An experienced financial planner will look at all your options and ways to help you reduce your IHT liabilities.
Receiving an inheritance advice, Nottingham and Derby
At Balance: Wealth Planning, we’ve helped numerous clients through the financial and emotional complications of receiving an inheritance. As one of our clients, you can rest assured that the advice you receive is from a trusted financial planner. Our aim is to help you secure your financial future, so that it’s fully protected for both you and your family to enjoy.
For more information, please see our inheritance tax (IHT) planning services or download our ‘Receiving an inheritance’ guide.
If you’ve received an inheritance and need estate planning advice, please get in touch with our financial planners.
Sources:
https://www.which.co.uk/money/tax/inheritance-tax/ways-to-avoid-inheritance-tax-aQp6g1p9xVJQ
