With springtime arriving, it’s natural for us to freshen up and get our house in order, but does that ever include our tax matters?
For most of us, the mere thought of tax is enough to drain us of all enthusiasm, let alone encourage us to consider whether we can save any. So let me try and inspire you with some of the following simple and effective ways on how to save tax, and add some flexibility into your future plans.
A few years ago, the rules changed on how an individual can access their defined contributions pension savings from the age of 55. There is now much more flexibility on the amount that can be withdrawn from a pension fund. Whilst it might seem a very tax-efficient option to create an income, particularly if that pension still provides a tax free lump sum, one should also consider the other tax implications.
For example, the pension member should check with the provider to see if the pension would be chargeable to inheritance tax in their estate on their death. If not, which is likely to be the case, it is necessary to then compare whether the draw down of an inheritance tax-free asset is the best option. It may be more tax efficient to exhaust other income sources such as ISA funds, or other cash savings that do not have an inheritance tax advantage. You can see that a review would certainly be time well spent.
Inheritance tax and provision for your family – this applies to you now!
Many couples might create a will that passes all of their assets over to their surviving spouse or civil partner at a first death because this is covered by the spouse exemption, and therefore creates no charge to inheritance tax. I’m not knocking this practice – it is commonly used and this may be how the individual has chosen to leave their assets.
However, what you should know is that there are more effective ways in which to reduce any future inheritance tax and also provide for your family. The opportunities include growth of assets away from inheritance tax, the protection and retention of assets away from care costs, amongst other benefits. In addition, the idea of using some assets for specified beneficiaries for different time periods can offer great flexibility that might suit a family that has just lost someone.
Tax exemption for your residential home
There is a tax-free amount for inheritance tax purposes, known as the residential nil rate band, for the home. This was introduced in April 2017 and gently increases to £150,000 from April 2019 and £175,000 from April 2020. It is widely believed that once someone’s estate is worth more than £2 million, this tax free amount waivers away to nothing. This is broadly true, however it is not so widely known how some simple and effective planning can bring this valuable tax relief back into play.
We also have to be mindful that when spouses or civil partners use the spouse exemption to transfer everything to each other, free of inheritance tax on first death, this does not mean the surviving spouse gains an overall £4 million threshold.
I can show you how to gain the advantage of the residential nil rate band, whatever your circumstances, if you give this some thought during your lifetime. It isn’t possible to change the position after death, even with a deed of variation on a will, but I can certainly guide you through a few options that you can plan towards. From April 2019, this tax relief is worth £60,000 per person.
Very often, the tax advantages don’t always lead the decision making and when working with clients, it is always my belief that the tax efficiency should fit around the wants and the wishes of the individual. After all, you wouldn’t want to decorate your home with wallpaper that you didn’t actually like, would you?
Tax planning isn’t essential but I hope that I’ve inspired you with just a few examples on how to improve your tax efficiency. If you have any queries, please don’t hesitate to get in touch, you have my details below.
With over 25 years of experience with clients and enjoying every moment, Amanda always strives for quality and service while providing tax efficiency. As well as supporting the client practice, Amanda lectures on tax matters across the country to qualified professionals and regularly works as a consultant to other firms on an array of tax matters, specialising in capital taxes, property tax, trust and estate matters. Email email@example.com or call 07909 530927.