With the usual rate of Inheritance Tax standing at 40%, there is a risk that your estate could be seriously depleted unless you make plans to legitimately minimise the amount that will be payable.
When Philip Seymour Hoffman died in 2014, he left a Will written before two of his three children had been born, leaving all of his estate to his partner, their mother.
This meant that his estate, worth an estimated $35 million, had to pay around $15 million to the IRS by way of estate tax. Had he been married, the tax would not have been payable.
The situation is similar in the UK, with failure to plan for Inheritance Tax leaving estates liable to substantial bills from HM Revenue & Customs.
Problems can arise not only with Wills that are not thought out properly, but when someone dies without a Will at all. When Prince died, he left an estimated $163 million and no Will to direct where this should go. Over $60 million was payable by way of tax on his estate.
Disputes over the value of the estate and allegations of an undervaluation also resulted in a fine of $6.4 million. Family members have been increasingly irritated by the handling of the problems that have arisen, some largely avoidable had the star left a valid Will.
Inheritance Tax planning
By leaving a Will that correctly sets out your wishes, you can both ensure that the next generation receives the assets you wish them to have and also protect your estate by legitimately minimising the amount of Inheritance Tax payable.
In the case of Philip Seymour Hoffman, it appears from his Will that his intention was that his partner use the money to raise their children. When she dies, tax will be due on the value of her estate too, so by the time their children inherit, tax will have been paid twice on the money.
By leaving funds in trust, some of the tax payments could have been avoided.
Alternatively, by marrying, it is possible to leave all of your assets to your spouse with no Inheritance Tax due.
Using the Inheritance Tax allowance
In the UK, Inheritance Tax is payable on the first £325,000 of someone’s estate. Where they are married and they leave everything to their spouse, the allowance is not used, as tax would not be payable anyway. This allowance can be transferred to the spouse, so that when they die they have their own allowance plus the unused allowance of the first to die, making a total of £650,000 on which no Inheritance Tax is payable.
In addition to this, there is a nil rate residence band available. Where parents pass a property to their children or grandchildren, a further allowance of £175,000 may be available for each parent, totaling £350,000. Added to the £650,000, this means that it may be possible to leave the first £1 million of a couple’s estate without any Inheritance Tax being payable.
Planning for Inheritance Tax and the transfer of wealth to the next generation can be complex and it is important to take advice from a genuine expert to to ensure you put the most efficient structure in place.
This information is for guidance only and should not be regarded as a substitute for taking full legal advice on specific facts and circumstances.