Inheritance Tax and your investments
Please note this blog post was published over 12 months ago and so may not include the most up-to-date information, for example where regulation around investing has changed.
All investments start with a long-term goal, to build wealth over a period of years. The clearest example of this is a Pension, where over a number of decades an investor aims to build a Pension pot to fund their retirement.
However, the goal doesn’t stop there, your investments could continue to grow even beyond retirement, and it is never too early to start considering your estate and Inheritance Tax.
What is Inheritance Tax?
Inheritance Tax is the money paid to HMRC when you die, dependent on the value of your estate upon your death.
Your estate is the total value of all your assets, such as your properties, savings and investments.
You only need to pay Inheritance Tax on your estate if it is over a certain threshold. In the current 2022/23 tax year, that threshold is £325,000.
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.
For example, if your estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).
That would still be a tax bill of £70,000, but by planning ahead there are ways to potentially reduce this cost and leave more of your estate to your chosen beneficiaries.
Being Inheritance Tax-efficient
Under current 2022/23 tax rules, most individuals have an Inheritance Nil Rate Band and a further allowance which can be offset against your main residence, this is called the Residence Nil Rate Band.
The Residence Nil Rate Band (RNRB) is an allowance which reduces the amount of Inheritance Tax an individual might pay when passing on a qualifying residence to a direct descendent. In the current 2022/23 tax year ,the Residence Nil Rate Band is currently £175,000 and is in addition to the Nil Rate Band.
There are also several options you can use to potentially reduce your Inheritance Tax bill and pass on more of your estate to your beneficiaries.
Investing in a Pension is just one of the ways to be Inheritance Tax efficient, as a Pension isn’t usually part of your taxable estate. Depending on your individual tax circumstances, it could make sense to leave your money invested in your Pension as long as possible and pass this wealth on to a beneficiary after your death.
Another way to be Inheritance Tax efficient is to leave at least 10% of your estate to charity, if appropriate, as your family may be able to pay a reduced rate of tax.
What can you do?
One of the most important things to do is prepare a will and make sure your expression of wish is up to date. This can help make sure your estate passes to the beneficiaries you have chosen and can help prevent costly legal battles for your heirs.
Once you have prepared these documents, it can be useful to speak to your beneficiaries so they are prepared and know where to look and who to speak to when the time comes.
As a True Potential client, you can save a copy of your will in the secure ‘Documents’ section of your account. If you have a True Potential pension, you can also nominate and update your beneficiaries through your account.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Tax examples are correct for the 2022/23 tax year at the time of publication, but tax rules can change at any time. This blog is not a personal recommendation or financial advice.