Inheritance tax: Britons urged to use ‘extremely tax efficient’ savings option to cut bill
Inheritance tax explained by Interactive Investor expert
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Recent data from HM Revenue and Customs (HMRC) has found that IHT receipts for last tax year came to £6.1billion. This is a sharp 14 percent increase from the previous year and an increase of £729million.
For the 2019-20 tax year, the average inheritance tax increased by £7,000 from £209,000 to £216,000.
Inheritance tax (IHT) can cost family and friends thousands when a loved one passes away – but there are ways to legally ensure that people are leaving behind as much as possible to their relatives when the time comes.
“Planning is key – it’s never too early to do this,” an expert stated.
Express.co.uk spoke exclusively Stevie Heafford, Partner at accountancy firm HW Fisher on how Britons can use their pensions in a tax efficient way.
She explained that with the IHT nil-rate bands frozen for the next few years, it is more important than ever to ensure someone’s affairs are in order.
This will help keep more of their hard-earned assets out of the claws of the taxman.
When it comes to long-term savings, pensions are now extremely tax efficient on death. There is usually no IHT to pay and it is even possible to pass on one’s pots tax-free to their nominated beneficiaries if they die before age 75.
She stressed that people should “maximise their savings.”
Ms Heafford said: “Most pension pots fall outside of the estate for the purposes of inheritance tax and so they can be passed on free of inheritance tax on death.
“This contrasts with other investments such as bank accounts, ISA’s and portfolios. Whilst ISAs give the opportunity for tax free growth and income, they still fall within the taxable estate on death and are subject to inheritance tax at that point.
“So if you have a pension pot but also other investments, it makes sense to utilise the other investments to defray expenses during lifetime (or even to make lifetime gifts) and leave the pension to be passed on tax free on death.
“By way of example, if you have a pension of £100k plus cash of £100k and you draw down on the cash during lifetime, you would save £40k in inheritance tax.”
It should be noted however that there may be some charges that come with passing on a pension.
If someone has a defined benefit pension, any money to be paid to their beneficiaries will be as outlined in the scheme’s rules.
Britons should check with the pension administrator to find out what their beneficiaries might be entitled to when they die, as the rules of each scheme are different.
Pension administrator might pay a dependant’s pension to:
- Their spouse or civil partner
- Their child(ren), providing they are under the age of 23 and in full-time education
- Their child(ren), regardless of age, if they’re mentally or physically impaired
- anyone who was financially dependent on you (or where you both relied on each other financially) when you died, including a partner you weren’t married to or in a civil partnership with.
The pension they will get will be a percentage of the pension they were getting (or would have got if the person died before their pension started being paid).
Any income paid to a dependant will be taxed as earnings at their marginal rate.
Ms Heafford continued: “However, there can be other tax charges associated with passing on pensions depending on the type of pension it is, how you are paid the pension and the age of the person who has died.
“For example, if you receive a lump sum payment and the owner of the pension was under the age of 75 when they died, you will usually pay no tax.
“If you receive a lump sum but the owner of the pension was over 75 when they died, you will usually be subject to income tax which will be deducted by the provider.”
If passing money onto loved ones is important to someone, it’s worth reviewing where their assets are held to ensure they aren’t exposing more than is necessary to IHT.
Britons are reminded that it can be worth considering speaking to a qualified financial adviser to understand their options.
They will need to pay a fee for their services, but often their expertise in navigating the tax maze will actually save families thousands of pounds.
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