A significant aspect to considering inheritance tax advice in the UK for most affected people is always going to be dependent on property values. Considering London’s population and average property values being the highest in the UK, it presents a unique challenge for effective estate planning in London. This is because the value of a London home can use up one’s inheritance tax exemption entirely. This could present an unintended consequence where asset rich, cash poor families would need to sell a home to pay the inheritance tax bill or pay high rates of interest to fund it.
Estate planning in London intertwines the challenge of a greater exposure to inheritance tax with asset illiquidity. Without inheritance tax advice families risk their ability to retain an income generating asset that can improve the financial well-being of beneficiaries. Therefore, inheritance tax needs to assume a pivotal role in the financial narrative of parents and children alike.
Overview of Inheritance Tax
Inheritance Tax is a 40% levy on a deceased person’s estate applied when assets pass down to lineal descendants. The estate compromises of everything you own; property, investments, cash, personal belongings but it excludes money purchase pensions and assets that qualify for business relief.
Every person has an allowance on which they can pass down assets without paying Inheritance Tax. This is called the standard Nil Rate Band (NRB) and it is £325,000. A married couple can utilise the inter-spousal exemption meaning the NRB passes to the surviving spouse on 1st death and the combined NRB value of £650,000 can be used before any tax is paid when the surviving spouse passes away.
An additional Inheritance Tax allowance called the Main Residence Nil Rate Band (RNRB) can be used when a primary residence is passed on to direct descendants, such as children or grandchildren. The RNRB is £175,000 and the inter-spousal exemption can be used meaning a total of £1,000,000 of allowances is available to married couples. One needs to be mindful, however, that the RNRB tapers away for estates valued over £2M.
Estate planning in London is complicated by lofty property valuations combined with the likelihood that mortgages will be (and should be) paid off in old age and by the time Inheritance Tax is due on death. Should mortgages not be paid off or there not be an appropriately structured insurance policy in place, the lender will eventually demand the repayment of their loan, which could require the sale of the property, which may trigger Capital Gains Tax at rates as high as 28%. Should you die a few years later, those unspent sale proceeds could then be subject to inheritance tax at 40%.
There are several ways to reduce or manage your exposure to inheritance tax, and it goes without saying the best time to start estate planning in London is yesterday but seriously you should be obtaining tax planning and financial planning advice from the moment you realise you are building wealth. This is because the decisions you make whilst you are building wealth could ensure that you are structuring your wealth in the most tax-effective way from day 1 which could avoid expensive planning solutions later in life that could amount to tens of thousands in advice and implementation fees.
Here’s 6 effective estate planning in London strategies to consider
- Put in place specialist wills and multiple trusts with expert trustees
- Put in place correctly structured life policies; this is more than assigning your life policy into trust.
- Set up a clever alphabet share company structure from day 1 of your property investment portfolio.
- Gift strategically during lifetime.
- Don’t just think of a pension as a retirement planning vehicle but also as a succession planning vehicle.
- Diversify your investment holdings and your tax wrappers.
In conclusion, navigating inheritance tax in the UK is a labyrinth, with estate planning in London presenting additional challenges due to higher property values. Therefore, meticulous planning to ensure optimal wealth preservation for the next generation is crucial.