Important Inheritance Tax Changes & You

Published: Wed, 04/27/16

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Financial Tips

Helping Dentists & Doctors Achieve Their Most Important Goals

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Welcome to Financial Tips!

Published every month by Rutherford Wilkinson Ltd,
written by Financial Planners Ray Prince and Graeme Urwin.

Approximate time to read: 6 minutes

In This Week's Issue:

  1. Feature Article: Important Inheritance Tax Changes & You
     
  2. Hot Topics Q & A: Be Careful With Tax Avoidance
     
  3. Wrap-Up (Graeme)

Important Inheritance Tax Changes & You

 

Last year we wrote an article on Inheritance Tax (IHT) and how you mitigate this by using joint life cover payable on second death.

This was only a year ago, and already there have been major rule changes announced that can have a major effect on how much your family may have to pay the taxman!

Last year HMRC raised over £4 billion from IHT alone!

This major change is about your home acquiring it’s own nil rate band, on top of your existing allowances.

It's called a ‘main residence band’.

As most of our clients have property that has a high value as a proportion of their overall estate, this is very important. Please note that the changes are from 2017 and have caveats.

So let’s look at this new situation.

Basic Summary of Allowances

  • The current allowance whereby no inheritance tax is charged is on the first £325,000 (per person) of someone's estate, which is the value of their total assets they leave behind when they die.  So for a couple it is £650k.
     
  • Above the threshold, the charge is 40% (or 36% if you leave at least 10% of your assets to a charity)
New Main Residence Rules
  • The new tax-free 'main residence' band will be introduced from 2017, but it is only valid on a main residence and where the recipient of a home is a direct descendant (classed as children, step-children and grandchildren) and not into a trust. It is being phased in gradually; starting at £100,000 (again, per person for a married couple or those in a civil partnership) from April 2017, rising by £25,000 each year till it reaches £175,000 in 2020.
     
  • So, in 2017 the maximum that can be passed on tax-free is £850,000 for married couples or those in a civil partnership, £425,000 for others. For singles, this is made up of the existing £325,000, plus the extra £100,000. For couples, when the first one dies  their allowance is passed to the survivor, so that £425,000 is doubled to £850,000.
     
  • In 2020, the tax-free amount will rise to £1m for couples, £500,000 for singles, as the main residence allowance rises.
     
  • Currently, without the 'main residence' additional allowance, couples can leave a home worth £650,000 without it attracting inheritance tax - for singles it is £325,000.
     
  • On properties worth £2 million or more, homeowners will lose £1 of the 'main residence' allowance for every £2 of value above £2m. So for a couple, Properties worth £2,350,000 or more will get no additional allowance.
     
  • Those who downsize now and therefore may have cash once their home is sold and where that money once formed part of the equity in a property, will still be able to pass on the same value of their estate tax-free to their dependents as had they kept a pricier property.
     
  • Anyone who downsizes their property and who dies after 2017 will still get the main residence threshold added to their allowance.

So as an example, using a recent client we worked with the following will apply (excluding inflation):

2016

  • Home value £1.1 million
  • Other assets £450,000
  • Total Estate £1.55 million
  • IHT bill £360k

2020

  • Home value £1.1 million
  • Other assets £450,000
  • Total Estate £1.55 million
  • IHT bill £220k

So a welcome saving of £140k.

However, not taking inflation into account means that the tax hit is likely to be more!

The Financial Tips Bottom Line

It really pays to pre-empt a problem with IHT rather than try to react later. 

Action Point

If your assets are considerable, and certainly if they are higher than £1m, make sure you have a robust strategy in place to ensure your estate goes to those who you want to benefit - not to the taxman. 

Hot Topics Q&A: Be Careful With Tax Avoidance

 
Every week we receive questions from clients regarding all aspects of their financial planning. So, rather than keep the answers to ourselves (and clients) we publish one key topic each issue. 
 

Q. As a high earning dentist, I pay large amounts of income tax. I get it that this goes with the territory, but I want to explore schemes which can help reduce my tax bill.

What advice would you give? 

A. You are of course not alone in wanting to minimise the amount of tax you pay. This is something that we cover with all clients to one degree or another.

Sticking to income tax, and gaining a relief, there are few tried and tested routes that would make a significant impact.

Pension Investment - if you invest in a pension then this will reduce your top level of tax you pay. The problem however is that the vast majority of our clients are being hit by the reduction in the Lifetime Allowance, that limits the size of the pension pot you can build up.

You could take out a pension for a spouse or children however.

Enterprise Investment Scheme (EIS) & Venture Capital Trusts (VCT) - here you can gain 30%tax credits as long as you have paid the amount of income tax you are claiming. So a £100k investment would get a £30k tax credit.

These are riskier investments, with special rules, but can be valuable as part of an overall strategy.

Of course there are other ways you can help save tax. For example, maximise your Isa allowances which are now a lot higher at over £15k pa per person.

We would add a note of caution at this point!

We have had clients who have in the past been advised by advisers or accountants to invest in various weird and wonderful schemes.

This has in our experience resulted in a massive tax bill in the future when the scheme fails!

The carrot of wiping out a tax bill is very tempting, and these schemes can sound almost foolproof. Our advice would be to think many times before you even consider them!!

Figures show that HMRC had collected more than £2 billion in disputed tax from tax  avoiders, in 2014 alone. If anything HMRC are tightening the noose.

This is merely a brief look at this subject, and as ever we urge you to get professional advice.

Please send us your questions! It's easy to do. Just send an email to us here (and if we publish it we'll make it anonymous).

Wrap-Up - Sad Deaths of My TV Friends

 
was born at the end of the 50's, and was very fortunate in many ways to grow up in the 60' & 70's.

I’ve benefited from the incredible progress in technology, and take for granted things like jet travel, dish washers, washing machines and dryers, as well as cars that do not need an oil change every few thousand miles! (My dad has loads of stories like this).

Another area is medicine, with new operations and cures being announced weekly. Hundreds of thousands of people benefit every year, probably including many you know.

But back to the 60s & 70s, and in particular TV.

What a golden age it was - as well as a few total duds!

Many of the entertainers who found a new medium in TV were of the old school. They toured the theatres in the two decades before the little screen became popular, honing their skills and timing to perfection.

The best example perhaps was Morecambe & Wise, who dominated Christmas every year in the 70's.

Enjoy this classic
 

What brought all this to mind was the news that we had lost another truly great performer, Victoria Wood.

This came after we seemingly had a rash of deaths in 2015 and into 2016 of some very famous names.

In no particular order, and ones that speak to me:

Cilla Black - George Cole - Gordon Honeycombe

Nicholas Smith (Mr Rumbold) - Maureen O'Hara

Dean Jones, star of The Love Bug - Omar Sharif

James Last - Christopher Lee - Patrick Macnee

Errol Brown - Keith Harris - Leonard Nimoy

Alan Rickman - Terry Wogan - David Bowie

Paul Daniels - Ronnie Corbett

And now Prince!

Ronnie Corbett was one of my favourites, a small man with a big heart. Who can forget one of the greatest TV sketches of all time, Four Candles, with the fantastic Ronnie Barker.

I still laugh now at the pure beauty of it - a simple idea, magic acting, and impeccable timing.

I am watching it now and am crying with laughter.

Treat yourself.

Look at the generalist shop. These were once common and family owned, ran by folk who knew their customers and provided a service with a smile. Now hardly any exist!

Good bye my TV friends, and thank you for your craft, and most of all the tremendous comedy.

We will never see your like again

Graeme Urwin

 
 

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ahead. Material supplied has been carefully checked for accuracy but no responsibility can be accepted for
inaccuracies or errors or from subsequent use of this material.

Specific professional advice must always be sought based on your own individual circumstances. As always, the
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We recommend you take independent advice before making any investment decisions. The writers do not accept any responsibility for any loss suffered by readers as a result of any such decisions.

 

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