There are simple steps you can take to make the passing of your estate to your heirs less stressful and less costly.
As house prices grow and people live longer, the size of estates being passed on after death is getting bigger. As a result, the number of court battles between family members or between benefactors and HM Revenue & Customs (HMRC) are on the rise, trebling in the ten years from 2006 to 2016.
The Sunday Times gives the example of the Folkes family, who have spent four years and at least £150,000 battling each other over their mother’s estate. Patricia Folkes suffered from dementia before her death in 2014, leading to arguments over how her finances were handled before her death, and how that diminished her estate.
“Dementia can cause numerous problems, both to the management of money during someone’s lifetime and during the disposal of their estate, with the Folkes case being an example of that,” Rachael Griffin of wealth manager Quilter tells Kate Palmer in The Sunday Times.
Thankfully, there is a straightforward step you can take before you get doddery to make life, and death, a lot simpler. “Setting up a power of attorney – nominating someone to look after your affairs if you become unable to – helps to avoid arguments over undue influence in wills,” says Palmer. Setting up a lasting power of attorney (LPA) is free – unless you get a solicitor involved – but you have to pay to register it. The registration fee is £82 in England and Wales, £77 in Scotland and £127 in Northern Ireland.
You can nominate anyone to hold the LPA, so the responsibility can be shared between people. If you have complicated finances, then you may want to appoint a professional such as an accountant or a solicitor, as well as a family member.
Cut your IHT bill with gifts
Meanwhile, The Daily Telegraph last week carried the story of a man who has spent ten years fighting HMRC. The argument stems from whether a £2m trust was liable for inheritance tax (IHT).
If you want to avoid your beneficiaries going through an IHT battle, think twice before you opt for complicated schemes. Trusts are not always the most efficient way of passing on a legacy and reducing your tax bill, says Harry Brennan in The Daily Telegraph. A straightforward gift can be a better way to cut your IHT bill. Although giving away cash seems an obvious way to reduce the value of your estate, HMRC is wise to this, and has set out various exemptions and restrictions.
There is no IHT to pay on small gifts you make our of normal income, such as Christmas or birthday presents, or on gifts between spouses or civil partners. On top of this, you can give away £3,000 a year as part of your “annual exemption”; you can also carry over unused allowance from previous years, up to a maximum of £6,000.
Each tax year, you can also give away wedding or civil-ceremony gifts of up to £5,000 per person for a child, £2,500 for a grandchild or great-grandchild, and £1,000 for anyone else. You can also give as many gifts of up to £250 to different people as you like, provided they’re not to the same people who’ve already benefited from a gift out of your annual exemption.
Anything you give away beyond this is still classed as part of your estate and assessed for IHT if you die within seven years of making the gift. However, the amount of IHT due on it decreases on a sliding scale three years after the gift was made, going from an IHT rate of 32% if the gift was made three to four years before your death, down to 8% if made six years before. So, if you think you’ve got more than three years left, a straightforward gift will still cut your IHT bill.
Pocket money… what to expect from the Budget
Next Monday, Chancellor Philip Hammond will deliver his annual Budget. Although nothing is set in stone, the newspapers have been eagerly predicting what is in store.
Theresa May’s promise of an extra £20bn for the NHS and an end to austerity puts the chancellor in a “tight spot”, says Anna Isaac in The Daily Telegraph. This leaves Hammond with only one option, according to the Institute for Fiscal Studies – “hike taxes”. The think tank predicts that Hammond could add 1% to VAT, income tax and National Insurance. “Combined, they plug the £20bn shortfall. Needless to say, this would be politically explosive,” says Isaac. “Such a move would take UK tax receipts to 35% of national income, the greatest share since the late 1940s.”
The Sun is predicting another rise in insurance premium tax. It has already gone from 6% in 2015 to 12% now, but the chancellor is planning to hike this tax even further, says the paper. If this happens, your premiums for car, home, pet or medical insurance will rise.
The Times thinks we could see changes to other taxes, expecting the chancellor either to announce or foreshadow ways to squeeze more from three already fruitful sources: capital-gains tax, inheritance tax and stamp duty. Finally, the Financial Times reckons your annual pension allowance could be cut. The change could be a reduction of the annual allowance from the current £40,000 to £35,000 or £30,000, predicts insurer Royal London, quoted in FT Advisor. This would mean more than 100,000 higher earners would lose tax relief of up to £4,000.
It may not all be bad news though. “There is a gap in the National Savings and Investments range for a regular savings bond with a decent rate,” says The Times. “Because NS&I … raises money for the government, this would also be an earner for the Exchequer.”
Though we can’t know for sure what next week’s Budget will involve, there are a few things you can do before taxes go up. Use your annual allowances – both for pensions and Isas – if you can afford to do so. Also, “consider realising profits in excess of the £11,700 capital gains tax allowance”, says Ian Cowie in the Times. “The current top rate of the tax – 20% – looks too good to last.”
Finally, Cowie suggests taking your 25% tax-free pension lump sum if you know what you want to do with it. “Most pundits reckon this perk is safe from the chancellor’s grasp, because cutting or cancelling it would be unpopular. Hammond, however, looks a desperate man who might make a desperate mistake.”