Inheritance Tax planning
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax payable on the value of a person's estate at death and on certain lifetime gifts. It is charged on death at 40% for estates over the threshold of £325,000, and at 20% on lifetime gifts into most trusts. Here we look at some of the measures you can take to mitigate the tax.
Establish just how much the Government could receive
The first step in any IHT plan is to determine what your current IHT liability would be. You might not be aware that some of the investments and insurance policies that you already own could afford significant IHT benefits. We need to ensure that the death benefits from your pension and life assurance policies are written in trust so that the benefits don't automatically fall into your estate on death.
We will produce a cashflow analysis to give you an excellent indication of what effect a 'potentially exempt transfer' or series of annual gifts might have on your long-term finances, and also estimate how much IHT would be payable at different times.
In an ideal world, we would all live a long and happy life and pass away with no more than the Nil Rate Band. Sticking to a well thought out long-term financial plan can help you get close to this ideal. The use of a cashflow analysis in this process is invaluable. Our report will also include some simple steps you can do yourself to reduce the IHT burden.
Give away the value of your property while you still live there
Leading tax and legal experts agree that a family home should only form part of an inheritance tax plan as a last resort. Wherever possible, it is usually preferable to look towards other asset classes when considering planning of this nature.
However, current house prices have meant that more and more people are likely to be subject to IHT. Accordingly, where the family home represents the main asset of the estate, it cannot easily be ignored where IHT mitigation is a priority.
Tax planning opportunities involving the family home are limited, with legislation (such as the Pre Owned Asset Tax), case law and HMRC practice restricting the effectiveness of IHT schemes involving property. Nevertheless, there are still opportunities and solutions available.
One such solution enables the value of your principle residence to be passed to your heirs without requiring you to move out of your home. Unlike other schemes, this has already been given prior approval by HMRC. We have access to other similar solutions, as well as providing advice on some simple steps you can take immediately to put this plan in to effect.
Our Residential IHT Solutions will establish if you can benefit from these schemes
Remove assets from your estate quickly while retaining full access and control
It should not be assumed that nothing can be done about IHT simply because the individual concerned is elderly. Sizeable gifts will benefit from a decrease in the associated IHT charge after three years. If survival for a two year period is a reasonable prospect, it may be worth considering a switch to investments that will enjoy agricultural or business property relief at the end of that period.
Typically, these involve investing in shares quoted on the Alternative Investment Market; however this route may be too risky for some.
We have a number of other solutions that remove this risk while still achieving the same objectives of removing the capital from your estate in two years while you retain full access to the funds. These solutions feature:
- A high degree of capital security offering the option of an ongoing income
- The prospects of stock market growth with protection of any loss on death
- Shelter against death during the first two years
Our IHT Investment Solutions can remove assets from your estate swiftly and efficiently
Maintain an income while reducing your IHT liability
Generally speaking, gifts made during your lifetime are not chargeable to IHT when made, but constitute what is known as 'potentially exempt transfers'. Unless you have reserved a benefit in the asset concerned, these gifts are no longer liable for IHT, provided that you survive for a period of seven years from the date of the gift.
Trusts are often associated with IHT planning, particularly in the context of the very wealthy. It is worth bearing in mind, however, that their main appeal is actually to do with the protection of assets. Put simply, the use of a trust enables an individual to benefit various family members while retaining control. It is possible to combine Gifting & Trusts to produce an IHT efficient solution while retaining access to an ongoing income for life.
Our Gifts & Trust Solutions will consider the various combination to meet your personal objectives
Plan to have someone else pay your IHT bill in full
Contributions to a life policy can be regarded both as an alternative and as complementary to IHT planning involving gifts, and can help your heirs pay any bill and release their inheritance. Policies are typically written in trust so that the proceeds do not form part of your estate on death. This means that these policies can be used to provide for an IHT liability, either in respect of the full estate (whole of life policies) or in case of death within seven years of making a gift (term assurance), without adding to the sum chargeable.
The changes to the IHT trust regime introduced by the Finance Act 2006, however, can impact upon life policies and advice should be taken where large sums are involved. There is also a wide range of investment products linked to life cover that can again provide the solution in the right circumstances.
Our IHT Protection Solutions will consider which of these options is best for you.
Please note: The Financial Conduct Authority does not regulate Inheritance tax planning, trusts,will writing services and certain aspects of employee benefits planning
Visit your local branch and talk to your Branch Manager who will be pleased to arrange an appointment with an Independent Financial Adviser. Alternatively, you can contact us on 0800 072 1100.
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