Ok, they might not strictly be that easy, but with lockdown inspiring many of us to embark on big clear outs, we wanted to let you about how you can also give your finances an extra spring clean. Here are a few examples.
1. Create a Will
Did you know 57% of UK adults don’t have a will in place?* There are many benefits to creating a Will; and once it’s done, it’s done:
- A will makes it much easier for your family or friends to sort everything out when you die – without a will the process can be more time consuming and stressful.
- If you don’t write a will, everything you own will be shared out in a standard way defined by the law – which isn’t always the way you might want.
- A will can help reduce the amount of Inheritance Tax that might be payable on the value of the property and money you leave behind.
- Writing a will is especially important if you have children or other family who depend on you financially, or if you want to leave something to people outside your immediate family.
If you don’t have a solicitor, we can point you in the right direction.
2. Gifting to reduce your inheritance tax (IHT) liability
It’s predicted that in the next financial year, £5.3 billion will go to the government in inheritance tax, so it’s a good idea to make sure you’re making the most of your IHT allowances.
In addition to the Nil Rate Band (NRB) of £325,000 per person, and potentially a further £175,000 per person Residents Nil Rate Band (depending upon eligibility), don’t forget there are other allowances available.
You have an annual “gift allowance” of £3,000 per year. This is often referred to as your annual exemption.
This means you can give away assets or cash up to a total of £3,000 in a tax year without it being added to the value of your estate for Inheritance Tax (IHT) purposes.
Any part of this annual exemption which you don’t use can be “carried forward” to next tax year. However, this “carried forward” allowance can only be used in the following tax year and can’t be carried over any further. Use it or lose it!
You can also gift up to £250 to as many people as you like per year (excluding anyone that has already benefited from your annual exemption in the same year). These gifts will not be subject to IHT.
Wedding gifts are also not subject to IHT – as long as the gift is made before the wedding, and the wedding takes place. There are however limits, as follows:
- Children – £5,000 or less.
- Grandchildren or great-grandchildren – £2,500 or less.
- Any other relative/friend – £1,000.
Often overlooked is gifting from surplus income. If you have enough income to maintain your current standard of living, you can make regular gifts from any surplus income which is considered exempt from IHT.
Such gifts must be a demonstrably regular commitment – for example a grandparent paying school fees – and it is recommended that you keep an accurate record of such gifts.
However, there is no upper limit to this allowance provided that all the criteria are met.
Finally, for those seeking a clearer conscience, gifts to charities, museums, universities and community amateur sports clubs are exempt from IHT.
3. Pension death benefit nominations
It is advisable to check that your current and previous pension plans have an up-to-date death benefit nomination, to ensure any resulting death benefit reflects your current wishes (as who you want to benefit may have changed over time). If there is no nomination, or you wish to make changes, it is a fairly straight-forward process.
4. Update your protection plans
Many of you will already have life cover policies in place, so it’s worth checking to see whether or they are held in an appropriate trust. Doing so can help to ensure that the death benefits payable go directly to your intended loved ones.
5. Utilise your marriage allowance
This one is often overlooked, but it allows a non-tax paying spouse to transfer £1250 of their annual (income tax) allowance to the other basic-rate tax paying spouse. This could save you £250 in tax. This is subject to certain eligibility criteria but once it’s set up you don’t have to reapply each year (but you do need to inform HMRC if you are no longer eligible). You can also back-date any unused allowance for up to 4 previous tax years.
If any of these inspire you, then please give us a shout and we can talk them through in more detail.
*Royal London research, Nov 2019