The truth about common inheritance tax myths
Many of us work hard during our lifetime to secure our property and put money away, happy in the knowledge that we will have a home and some financial security to pass on to our children and loved ones when we pass away.
However, failure to take into account the impact of Inheritance Tax could derail those plans entirely.
Inheritance Tax affects each of your assets differently, and taking the time to understand how it is applied can help you to minimise the impact it has on your legacy. Inheritance Tax will be charged on anything over the threshold. This is subject to change, but for the 2014-2015 tax year, the threshold is set at £325,000 at a rate of 40%.
All of your assets will be taken into account, including property, cars and valuables such as jewellery and any outstanding debts will be deducted.
MYTH: Your Life Insurance Policy Will Cover Your Inheritance Tax
Many people believe that if they have a life insurance policy, this will cover their Inheritance Tax and that, provided the amount on their policy is greater than the Inheritance Tax they incur, they won’t be affected. Unfortunately, this isn’t necessarily the case.
Unless your life insurance policy was specifically written to pay out to certain beneficiaries, it will be added to your estate as an asset. Which actually means it will increase your Inheritance Tax charge rather than reduce it.
MYTH: “Gifts” Made During Your Lifetime Will Not Incur Inheritance Tax
In reality, most of the assets that you choose to gift away during your lifetime will still incur some inheritance tax if you die within seven years of making them.
However, there are some things you can do to have gifts excluded from your estate, such as passing them over to your beneficiaries in the form of investments.
MYTH: ISAs Are Not Affected by Inheritance Tax
Although ISAs will protect your savings and investments from income tax, they are in no way immune from Inheritance Tax. The funds in your ISAs will be considered assets and will be added to your estate.
MYTH: If You Own Your Own Home, You’ll be Hard Hit by Inheritance Tax
Your bricks-and-mortar home is very tricky to protect from Inheritance Tax, but there are things you can do to minimise the impact.
One possibility is to take out a Whole of Life Protection Plan which will anticipate the amount of Inheritance Tax that is likely to be due on your estate. Again, the Whole of Life policy must stipulate that it will be paid to a trust.
MYTH: You Must Give Up Your Own Financial Security to Protect Your Family from Inheritance Tax
Unsurprisingly, many people get the impression that the only way to mitigate the impact of Inheritance Tax is to give up large portions of their estate to their family whilst they’re still alive.
However, with the right financial advice, you can make use of existing investment schemes to allow you to pass your assets and parts of your estate onto your loved ones during your lifetime whilst ensuring your own continuing financial security.
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