Most children have one thought about money: Spend! Or even three: Spend! Spend! Spend! Continue reading
I don’t want to be overly morbid but someday I will die (but not in the near future I hope!). This, and knowing I have a daughter who might be vulnerable financially, has made me think and ask questions about exactly how my estate will be taxed when I’m gone. Yes the dreaded inheritance tax. I’m sure it exists in most countries, even if the rules and guidelines vary. And I also believe it is something we all need to think about. These are 5 things I’ve learnt so far.
Point 1 Your Estate
Your estate is everything you own (your assets). And by own it means own. Your estate is what you own minus what you owe (your debts). The value of all your assets (like a house, car, shares, cash in the bank etc) are added together. Then all your debts (like mortgages, car loans, credit cards and anything else you owe) is also added up. Then the total of your debts is taken off the total of your assets, and this is your estate for inheritance tax purposes. For example, if you have a house and possessions worth £1,000,000 but you have £100,000 worth of mortgage and loans, your estate is really only worth £900,000.
Point 2 Inheritance Tax is 40%
Inheritance tax is set at a flat rate of 40%, regardless of your income. It is not like income tax that goes up in bands, so you will be taxed at 40p for every £1. £40 for every £100. £40,000 for every £100,000.
Point 3 The ‘Nil Rate Band’
Everyone is entitled to a nil rate band when they die, which is an amount of money taken off your estate before any tax due. At the moment (2017) the nil rate band is £325,000.
Point 4 The new ‘Residence Nil Rate Band’
The government has recently brought in an extra ‘Residence Nil Rate Band’ allowance for the family home. This means if your home is part of your estate, then you get an extra tax-free allowance of £100,000. (This financial year it is £100,000, but that is going to rise to £175,000 by 2020.)
If you were a single parent leaving an estate worth a total of £900, 000, the sums would look like this:
So if you, as a single parent, leaving your children an estate of £900,000, they will pay £190,000 tax. In effect your children will receive an actual inheritance of £710,000.
Point 5 Passing on Nil Rate Bands
There is a rule that allows spouses to leave their nil rate bands to each other. This means if one spouse dies, their nil rate band can be passed to the other spouse.
So, if your spouse dies in May 2017 and then you die in November 2017, then your £900,000 estate would look like this:
So if you leave your children an estate of £900,000, they will pay £20,000 tax. In effect your children will receive an actual inheritance of £880,000.
Understanding these 5 points has made me realise I need spend more time thinking about how my estate will be taxed. It makes me realise the importance of the nil rate band and the residence nil rate band, because this reduces the amount my children will be taxed.
Don’t get me wrong, I won’t be doing this all by myself. I’ll be talking to the professionals. But I hope because I understand the basics about inheritance tax, I will know the right questions to ask.
Disclaimer: I write from my experiences as a father trying to plan a secure financial future for my daughter with additional needs. The material presented here is for educational purposes only. I am not qualified or regulated to give financial advice, and even if I was you should never make important decisions based on things you read on a blog. Every family’s situation is different, and you should seek qualified, professional advice from a tax or financial advisor who understands your unique situation, and then make your decisions accordingly. Good advice will pay for itself in the long run.