Tag Archives: inheritance

Increased Wealth

Increased net worth and rising mortality rates

The earlier you put plans in place the more options you may have

With careful planning it may be possible to reduce significantly the need for your estate to pay Inheritance Tax. We spend a lifetime generating wealth and assets but not many of us ensure that it will be passed to the next generation – our children, grandchildren, nieces, nephews, and so on. Intergenerational wealth transfer is the passage of wealth from one family generation to the next.

It’s becoming increasingly important for more people to consider succession planning and intergenerational wealth transfer as part of their financial planning strategy. As the baby boomer generation reaches retirement age, we’re on the brink of a vast shift in assets, unlike any that we have seen before.

Wealth transfers
By 2027, it is expected that wealth transfers will nearly double from the current level of £69 billion, to £115 billion[1], coined as ‘the Great Wealth Transfer’ of the 21st century.

Intergenerational wealth transfer can be huge issue for all family members concerned. If done well and executed properly, it can make a real difference to the financial position of the recipients. If misjudged or poorly handled, it can cause enormous issues, conflicts and resentments that are never forgotten nor forgiven.

Financial implications
One aspect that hasn’t been widely considered is the impact on other family members, and in particular children, as their parents think about selling their business or retiring from their career, perhaps selling their family home, and starting life in retirement.

It is important that children are prepared to deal with this process, not least so they are aware of the financial implications and how they may be affected. For instance, children may be expecting to receive a certain amount of money from their parents – particularly those who are selling a business – and end up disappointed. Conversely, they may not be expecting to receive anything, and are therefore not equipped to deal with a windfall.

Contributory factors
According to the King’s Court Trust, £5.5 trillion will move hands in the United Kingdom between now and 2055, with this move set to peak in 2035[2]. Why? Well, there are a number of contributory factors that account for this. The two main reasons are increased net worth and rising mortality rates.

For those approaching, or in, retirement, it’s important to have frank and open conversations with children about expectations and also whether children have the knowledge and understanding to manage financial matters.

Approaching retirement
This is not an easy exercise, as you may not want to discuss your financial affairs with your children. You may find your children’s eyes are opened when they see what their parents have been able to achieve financially. They may even want to know how they can do that themselves and change their own habits.

Everyone works hard to provide for their family, and perhaps even leave them a legacy. However, parents approaching retirement shouldn’t feel that their family is solely reliant on them, or that they need to be responsible for their children’s financial situation.

Expressing wishes
A good approach is to help your children establish their own strong financial footing and be ready for intergenerational wealth transfer. For instance, introducing them to your professional advisers can provide comfort that there is someone they can go to for advice.

Having open conversations with your children and expressing wishes and goals will also ensure that your family are all on the same page, which can help reduce potential conflict later when managing intergenerational wealth transfer.

These are some questions you should answer as part of your intergenerational wealth transfer plans:

>  When did wealth enter my life and how do I think this timing influences my values and family relationships?
>  What impact does affluence have on my life and the lives of my next generation?
>  What was the key to my success in creating wealth and how might telling this story to my future generation be helpful?
>  What is my biggest concern in raising my children or grandchildren with affluence?
>  What conversations (if any) did I have with my parents about money and wealth growing up?
>  How did my parents prepare me to receive wealth?
>  What lessons did I learn from my parents about money and finance that I would like to pass on to my heirs?
>  What family values would I like to pass down to the next generation and how do I plan on communicating this
family legacy?
>  What concerns do I have about my adult children when it comes to inheriting and managing the family wealth?
>  How can I help prepare my beneficiaries to receive wealth and carry on our family legacy?

Between generations
Despite the vast amount of wealth likely to be passed down between generations, those in line for inheritance could end up being over-reliant on their expected windfall. The key will be to ensure younger generations are able to get involved and understand how to handle the wealth they will be inheriting, as well as being able to make good decisions about the wealth that they generate themselves.

You need to consider who will receive what and whether you want to pass your wealth during your lifetime or on death. These decisions then need to be balanced by the tax implications of any proposed planning. This is especially important at what can be a highly stressful time. By making advanced preparations, the burden of filing complicated Inheritance Tax returns can be reduced. It’s worth noting that UK Inheritance Tax receipts exceed £3 billion from 17,900 estates[3]. l

Source data:
[1] Kings Court Trust, ‘Passing on the Pounds – The rise of the UK’s inheritance economy’.
[2] Resolution Foundation, Intergenerational Commission. ‘The million dollar be-question’.
[3] Prudential 2019.

Wealth Preservation

Keeping wealth in the family

Inheritance Tax receipts reach £5.32 billion in 2020/21

Inheritance Tax is a tax on an estate (the property, money and possessions) of someone who’s died. Inheritance Tax receipts in the United Kingdom amounted to approximately £5.32 billion in 2020/21, compared with £5.36 billion pounds in the previous financial year, which was a peak for this provided time period[1].

Raising the money to pay an Inheritance Tax bill may mean cashing in any savings accounts held by the deceased and potentially selling some of the assets in the estate.
There is no easy way to say it – anticipating one’s death is an uncomfortable topic. Yet it is often worth pushing past the initial discomfort to pursue the potential rewards of effective wealth transfer planning. There are three places your assets can go at your death: to your family and friends, to charity or to the government in the form of taxes.

Almost half of all Baby Boomers say they have enough personal wealth that they can afford to gift some of it away during their lifetime, new research shows[2]. The figures, collected by YouGov, show that 48% of Baby Boomers say they could afford to give money to family members before they die. Less than a third (29%) ruled it out, and 26% say they are unsure.

Larger one-off wealth transfers
Of those who say they can afford to make lifetime gifts, 40% say they would favour multiple small gifts and a third (33%) would prefer larger one-off wealth transfers. A further 30% are unsure which would better suit their needs.

Despite the large number of people who estimate they can afford to pass some of their savings and assets to family members, government statistics suggest only between 31% to 39% of people aged 50-69 have ever given a financial gift. And just a small minority appear to have a plan for regular annual gifting, with just 15% of 50-59-year-olds having gifted in the last two years.

Intergenerational financial advice
The statistics reveal the importance of wealth transfer planning and lifetime gifting advice. It is estimated that around £5.5 trillion of intergenerational wealth transfers will occur over the next 30 years[3]. An effective plan can lessen the likelihood of family conflict, reduce estate costs, reduce taxes and preserve wealth.

Obtaining professional intergenerational financial advice will increasingly become a key part of financial planning for the Baby Boomer generation. This generation has accrued significant personal wealth, having benefitted from rising house prices, stock market growth and the higher prevalence of generous pension schemes, and they want to give younger generations a financial boost.

Lifeline for some younger people
In contrast, younger generations often find themselves facing high house prices and the need to make significant personal contributions to their Defined Contribution pensions in order to secure a decent retirement fund.

Gifting between the generations will increasingly become a lifeline for some younger people as they struggle to get on the housing ladder, pay for school fees and deal with the ever-increasing expenses of living.

Careful balancing act to figure out
Passing on wealth to the next generation is one of the most important yet challenging aspects of financial planning. It’s vital that helping the younger generations doesn’t come at the expense of your own retirement funds and so there is a careful balancing act to figure out if you can afford it. If you can afford to gift, it’s vitally important to consider the various Inheritance Tax and gifting rules.

Despite this, there is still a clear ‘gifting gap’ between the number of people who can afford to gift and those who actually have a lifetime gifting plan in place. Gifting is a great way to help you make the most of your financial assets and enjoy seeing your life savings helping your children and grandchildren.

Wealth transfer planning process
Establishing who gets what, how they get it and when they get it, are, as a general rule, personal matters. But these decisions can have significant financial implications. Life events, as well as market and regulatory factors, can impact the wealth transfer planning process. Therefore, it is important for your wealth transfer plan to remain flexible and be revisited and adjusted periodically.

Source data:
[1] //www.statista.com/statistics/284325/united-kingdom-hmrc-tax-receipts-inheritance-tax/
[2] Research commissioned by Quilter and undertaken by YouGov Plc, an independent research agency. All figures, unless otherwise stated, are from YouGov Plc. The total sample size is 1,544 UK adults, comprised of 529 Baby Boomers, 501 Generation Xers and 514 Millennials. Fieldwork was undertaken between 07/07/2020 – 08/07/2020. The survey was carried out online.
[3] ‘Passing on the pounds – The rise of the UK’s inheritance economy’. Published May 2019. Author: Kings Court Trust

Lifetime Transfers

Lifetime transfers

Giving away money from your estate to reduce your Inheritance Tax bill

An outright gift falls into one of two categories, depending the type of gift and to whom it’s made. These categories are Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs).

Inheritance Tax exemptions can be achieved by means of making certain exempt transfers, which apply in a number of cases including wedding gifts, life assurance premiums, gifts to your family and charitable giving.

If appropriate, you can transfer some of your assets while you’re alive – these are known as lifetime transfers. Whilst we are all free to do this whenever we want, it is important to be aware of the potential implications of such gifts with regard to Inheritance Tax. The two main types are ‘potentially exempt transfers’ and ‘chargeable lifetime transfers’.

Exempt transfers
Potentially exempt transfers are lifetime gifts made directly to other individuals, which includes gifts to Bare Trusts. A similar lifetime gift made to most other types of Trust is a chargeable lifetime transfer. These rules apply to non-exempt transfers: gifts to a spouse are exempt, so are not subject to Inheritance Tax.

Where a potentially exempt transfer fails to satisfy the conditions to remain exempt – because the person who made the gift died within seven years – its value will form part of their estate. Survival for at least seven years, on the other hand, ensures full exemption from Inheritance Tax. Chargeable lifetime transfers are not conditionally exempt from Inheritance Tax. If it is covered by the Nil-Rate Band (NRB) and the transferor survives at least seven years, it will not attract a tax liability, but it could still impact on other chargeable transfers.

Seven years
Chargeable lifetime transfers that exceed the available NRB when they are made result in a lifetime Inheritance Tax liability. Failure to survive for seven years results in the value of the chargeable lifetime transfers being included in the estate. If the chargeable lifetime transfers are subject to further Inheritance Tax on death, a credit is given for any lifetime Inheritance Tax paid.

Following a gift to an individual or a Bare Trust (a basic Trust in which the beneficiary has the absolute right to the capital and assets within the Trust, as well as the income generated from these assets), there are two potential outcomes: survival for seven years or more, and death before then. The former results in the potentially exempt transfer becoming fully exempt and no longer figuring in the Inheritance Tax assessment. In other case, the amount transferred less any Inheritance Tax exemptions is ‘notionally’ returned to the estate.

Tax consequences
Anyone utilising potentially exempt transfers for tax migration purposes, therefore, should consider the consequences of failing to survive for seven years. Such an assessment will involve balancing the likelihood of surviving for seven years against the tax consequences of death within that period.

Failure to survive for the required seven-year period results in the full value of the potentially exempt transfers being notionally included within the estate; survival beyond then means nothing is included. It is taper relief which reduces the Inheritance Tax liability (not the value transferred) on the failed potentially exempt transfers after the full value has been returned to the estate.

Earlier transfers
The value of the potentially exempt transfers is never tapered. The recipient of the failed potentially exempt transfers is liable for the Inheritance Tax due on the gift itself and benefits from any taper relief. The Inheritance Tax due on the potentially exempt transfers is deducted from the total Inheritance Tax bill, and the estate is liable for the balance.

Lifetime transfers are dealt with in chronological order upon death; earlier transfers are dealt with in priority to later ones, all of which are considered before the death estate. If a lifetime transfer is subject to Inheritance Tax because the NRB is not sufficient to cover it, the next step is to determine whether taper relief can reduce the tax bill for the recipient of the potentially exempt transfers.

Sliding scale
The amount of Inheritance Tax payable is not static over the seven years prior to death. Rather, it is reduced according to a sliding scale dependant on the passage of time from the giving of the gift to the individual’s death.
No relief is available if death is within three years of the lifetime transfer. For survival for between three and seven years, taper relief at the following rates is available.

Taper relief
The rate of Inheritance Tax gradually reduces over the seven-year period – this is called taper relief. It works like this:

*How long ago was the gift made?
**How much is the tax reduced?

*0-3 years **No reduction
3-4 years 20%
4-5 years 40%
5-6 years 60%
6-7 years 80%

More than 7 years
No tax to pay.

It’s important to remember that taper relief only applies to the amount of tax the recipient pays on the value of the gift above the NRB. The rest of your estate will be charged with the full rate of Inheritance Tax – usually 40%.

Donor pays
The tax treatment of chargeable lifetime transfers has some similarities to potentially exempt transfers but with a number of differences. When a chargeable lifetime transfer is made, it is assessed against the donor’s NRB. If there is an excess above the NRB, it is taxed at 20% if the recipient pays the tax or 25% if the donor pays the tax.

The same seven-year rule that applies to potentially exempt transfers then applies. Failure to survive to the end of this period results in Inheritance Tax becoming due on the chargeable lifetime transfers, payable by the recipient. The tax rate is the usual 40% on amounts in excess of the NRB, but taper relief can reduce the tax bill, and credit is given for any lifetime tax paid.

Gift of capital
The seven-year rules that apply to potentially exempt transfers and chargeable lifetime transfers could increase the Inheritance Tax bill for those who fail to survive for long enough after making a gift of capital.

If Inheritance Tax is due in respect of a failed potentially exempt transfer, it is payable by the recipient. If Inheritance Tax is due in respect of a chargeable lifetime transfer on death, it is payable by the trustees. Any remaining Inheritance Tax is payable by the estate.

Appropriate Trust
The Inheritance Tax difference can be calculated and covered by a level or decreasing term assurance policy written in an appropriate Trust for the benefit of whoever will be affected by the Inheritance Tax liability and in order to keep the proceeds out of the settlor’s Inheritance Tax estate. Which is more suitable and the level of cover required will depend on the circumstances. If the potentially exempt transfers or chargeable lifetime transfers are within the NRB, taper relief will not apply.

However, this does not mean that no cover is required. Death within seven years will result in the full value of the transfer being included in the estate, with the knock-on effect that other estate assets up to the value of the potentially exempt transfers or chargeable lifetime transfers could suffer tax that they would have avoided had the donor survived for seven years.

Estate legatees
A seven-year level term policy could be the most appropriate type of policy in this situation. Any additional Inheritance Tax is payable by the estate, so a Trust for the benefit of the estate legatees will normally be required.

Where the potentially exempt transfers or chargeable lifetime transfers exceed the NRB, the tapered Inheritance Tax liability that will result from death after the potentially exempt transfers or chargeable lifetime transfers are made can be estimated.

‘Gift inter vivos’
A special form of ‘gift inter vivos’ (a life assurance policy that provides a lump sum to cover the potential Inheritance Tax liability that could arise if the donor of a gift dies within seven years of making the gift) is put in place (written in an appropriate Trust) to cover the gradually declining tax liability that may fall on the recipient of the gift.

Trustees might want to use a life of another policy to cover a potential liability. Taper relief only applies to the tax: the full value of the gift is included within the estate, which in this situation will use up the NRB that becomes available to the rest of the estate after seven years.

Whole of life cover
Therefore, the estate itself will also be liable to additional Inheritance Tax on death within seven years, and depending on the circumstances, a separate level term policy written in an appropriate trust for the estate legatees might also be required.

Where an Inheritance Tax liability continues after any potentially exempt transfers or chargeable lifetime transfers have dropped out of account, whole of life cover written in an appropriate Trust should also be considered.

Read more at Which? : //www.which.co.uk/money/tax/inheritance-tax/inheritance-tax-planning-and-tax-free-gifts-aw1mb2n7snwx

Estate Planning 2021

More Families Subject to Inheritance Tax

Balancing your plan with other financial priorities is key

Making provision for Inheritance Tax needs to be balance the plan with your other financial priorities is key. Effective estate preservation planning could save a family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds.

Inheritance Tax was introduced in 1986. It replaced Capital Transfer Tax, which had been in force since 1975 as a successor to Estate Duty.

Inheritance Tax planning has become more important than ever, following the Government’s decision to freeze the £325,000 lifetime exemption, with inflation eroding its value every year and subjecting more families to Inheritance Tax.

Automatic rights
Inheritance Tax is usually payable on death. When a person dies, their assets form their estate. Any part of an estate that is left to a spouse or registered civil partner will be exempt from Inheritance Tax. The exception is if a spouse or registered civil partner is domiciled outside the UK. Unmarried partners, no matter how long-standing, have no automatic rights under the Inheritance Tax rules.

However, there are steps people can take to reduce the amount of money their beneficiaries have to pay if Inheritance Tax affects them. Where a person’s estate is left to someone other than a spouse or registered civil partner (i.e. to a non-exempt beneficiary), Inheritance Tax will be payable on the amount that exceeds the £325,000 Nil-Rate Band (NRB) threshold. The threshold is currently frozen at £325,000 until the tax year 2021/22.

Deceased spouse
Every individual is entitled to a NRB (that is, every individual is entitled to leave an amount of their estate up to the value of the NRB threshold to a non-exempt beneficiary without incurring Inheritance Tax). If a widow or widower of the deceased spouse has not used their entire NRB, the NRB applicable at the time of death can be increased by the percentage of the NRB unused on the death of the deceased spouse, provided the executors make the necessary elections within two years of your death.

To calculate the total amount of Inheritance Tax payable on a person’s death, gifts made during their lifetime that are not exempt transfers must also be taken into account. Where the total amount of non-exempt gifts made within seven years of death plus the value of the element of the estate left to non-exempt beneficiaries exceeds the nil-rate threshold, Inheritance Tax is payable at 40% on the amount exceeding the threshold.

Tapered away
This percentage reduces to 36% if the estate qualifies for a reduced rate as a result of a charity bequest. In some circumstances, Inheritance Tax can also become payable on the lifetime gifts themselves – although gifts made between three and seven years before death could qualify for taper relief, which reduces the amount of Inheritance Tax payable.

From 6 April 2017, an Inheritance Tax Residence Nil-Rate Band (RNRB) was introduced in addition to the standard NRB. It’s worth currently up to £175,000 for the 2021/22 tax year. It starts to be tapered away if an Inheritance Tax estate is worth more than £2 million on death.

Residential property
Unlike the standard NRB, it’s only available for transfers on death. It’s normally available if a person leaves a residential property that they’ve occupied as their home outright to direct descendants.

It might also apply if the person sold their home or downsized from 8 July 2015 onwards. If spouses or registered civil partners don’t use the RNRB on first death – even if this was before 6 April 2017 – there are transferability options on the second death.

Personal representatives
Executors or legal personal representatives typically have six months from the end of the month of death to pay any Inheritance Tax due. The estate can’t pay out to the beneficiaries until this is done. The exception is any property, land or certain types of shares where the Inheritance Tax can be paid in instalments. Beneficiaries then have up to ten years to pay the tax owing, plus interest.

Estate Planning 2021

Making suitable plans

Organise how much you could leave for the people you care about

Inheritance Tax can cost families thousands of pounds but there are various ways to legally avoid paying this tax. Without making suitable plans, your loved ones could face a tax bill of 40% on the value of everything you own above a certain threshold.

Whether you have earned your wealth, inherited it or made shrewd investments, you will want to ensure that as little of it as possible ends up in the hands of the taxman and that it can be enjoyed by you, your family and your intended beneficiaries.

If you pass away and don’t have provision in place to preserve and protect your assets, then your family may end up spending a substantial amount of time and money battling over your wealth.

This process of dividing up your assets could become complicated. Estate planning gives you control over what happens to your assets when you pass away. It is a fundamental part of financial planning, no matter how much wealth you have accumulated.

Not only does an estate plan help to ensure that those who are important to you will be taken care of when you’re no longer around, but it can also help ensure that assets are transferred in an orderly manner, and that Inheritance Tax liabilities are minimised.

The process involves developing a clear plan that details how you would like all of your wealth and property to be distributed after your death. It involves putting documentation in place to ensure that your assets are transferred in line with your wishes.

Your estate consists of everything you own. This includes savings, investments, pensions, property, life insurance (not written in an appropriate trust) and personal possessions. Debts and liabilities are subtracted from the total value of all assets.

What to consider when developing an effective plan for the future

Write a Will
One of the most important components of an estate plan is a Will. First and foremost, a Will puts you in control. You choose who will benefit from your estate and what they are entitled to. You also decide who will administer your affairs after your death.

If you don’t make a Will, the intestacy rules will decide who benefits from your estate – and that can produce undesirable results. The law also sets a hierarchy of who is able to handle your financial affairs after death, and that can lead to problems if the person is not suitable because of age, health, geographical location, or for any other reason.

Make a Lasting Power of Attorney
A Lasting Power of Attorney (LPA) can be made for Property and Financial Affairs, as well as Health and Welfare. These documents can be put in place at any time, and it is important to consider setting them up, no matter what age you are.

An LPA sets out your wishes as to who should assist you in relation to your property and financial affairs and your health and welfare. You can control who deals with these and set out any limitations and guidance.

Plan for Inheritance Tax
Once the Will and the LPA are sorted, the next step is to think about Inheritance Tax planning. Whenever someone dies, the value of their estate may become liable for Inheritance Tax. If you are domiciled in the UK, your estate includes everything you own, including your home and certain trusts in which you may have an interest.

Inheritance Tax is potentially charged at a rate of 40% on the value of everything you own above the Nil-Rate Band (NRB) threshold. The Nil-Rate Band is the value of your estate that is not chargeable to UK Inheritance Tax.

Gift assets while you’re alive
The amount is set by the Government and is currently £325,000, which is frozen until 2026. In addition, since 6 April 2017, if you leave your home to direct lineal descendants, the value of your estate before tax is paid will increase with the addition of the Residence Nil-Rate Band (RNRB). For the 2021/22 tax year, the Residence Nil-Rate Band is £175,000.

One thing that’s important to remember when developing an estate plan is that the process isn’t just about passing on your assets when you die. It’s also about analysing your finances now and potentially making the most of your assets while you are still alive. By gifting assets to younger generations while you’re still around, you could enjoy seeing the assets put to good use, while simultaneously reducing your Inheritance Tax bill.

Make use of gift allowances
A gift from one individual to another constitutes a Potentially Exempt Transfer (PET) for Inheritance Tax. If you survive for seven years from the date of the gift, no Inheritance Tax arises on the PET.

Each tax year, you can give away £3,000 worth of gifts (your ‘annual exemption’) tax-free. You can also give away wedding or registered civil partnership gifts up to £1,000 per person (£2,500 for a grandchild and £5,000 for a child). In addition, you can give your children regular sums of money from your income.

You can also give as many gifts of up to £250 to as many individuals as you want, although not to anyone who has already received a gift of your whole £3,000 annual exemption. None of these gifts are subject to Inheritance Tax.

Invest into IHT-exempt assets
For experienced suitable investors, another way to potentially minimise Inheritance Tax liabilities is to invest in Inheritance Tax exempt assets. These schemes are higher risk and are therefore not suitable for all investors, and any investment decisions should always be made with the benefit of professional financial advice.

One example of this is the Enterprise Investment Scheme (EIS). The vast majority of EIS-qualifying investments attract 100% Inheritance Tax relief via Business Relief (BR) because the qualifying trades for EIS purposes are very similar to those which qualify for BR. Qualification for BR is subject to the minimum holding period of two years (from the later of the share issue date and trade commencement).

Life insurance within a Trust
Writing life insurance in an appropriate Trust is one of the best ways to protect your family’s future in the event of your death. Your life insurance policy is a significant asset – and by putting life insurance in Trust, you can manage the way your beneficiaries receive their inheritance.
The proceeds from the policy can be paid directly to your beneficiaries rather than to your legal estate and will therefore not be taken into account when Inheritance Tax is calculated.

Keep wealth within a pension
A defined contribution pension is normally free of Inheritance Tax, unlike many other investments. It is not part of your taxable estate. Keeping your pension wealth within your pension fund and passing it down to future generations can be very tax-efficient estate planning.

If you die before 75, your pension will be passed on tax-free. However, if you die after 75, your beneficiaries will pay tax on the proceeds at their highest income tax rate. Your pension will not be covered by your Will, so you will need to ensure that your pension provider knows who your nominated beneficiaries are.

Preserved wealth for future generations
We all have one thing in common: we can’t take our assets with us when we die. If you want to ensure that your wealth is preserved for future generations and passed on efficiently, an estate plan is crucial.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING.
TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

Inheritance Tax planning 2021

Passing Assets Efficiently To The Next Generation

What will your legacy look like?

The coronavirus (COVID-19) pandemic has lead many people to reflect on their own mortality. No one
wants to think about their hard-earned wealth going to waste after they die. Sorting out your finances early
will help the people left behind when you die.

Protecting your estate is ultimately about securing more of your wealth for your loved ones and planning for what will happen after your death to make the lives of your loved ones much easier. It’s not nice to think about, but it means that your loved ones can carry out your wishes and be protected from Inheritance Tax (IHT).

Lifetime accumulating wealth
If you don’t make the right financial arrangements, your family could potentially have to foot a hefty IHT bill in the event of your premature death. Passing assets efficiently to the next generation remains a primary objective for many who have spent a lifetime accumulating their wealth. Providing funds for family members or a charitable interest is also an important way to see the benefit of your wealth during your lifetime, as well as leaving a legacy.

IHT is the amount of tax owed on a person’s estate once they have become deceased. The government assesses what a person’s estate is worth once they die, which includes any assets including property minus any debts.

Nil-rate band
%e rate of tax on death is 40%, and 20% on lifetime transfers where chargeable. For 2021/22 the first £325,000 chargeable to IHT is at 0% and this is known as the ‘nil-rate band’. The nil-rate band has been frozen at £325,000 since 2009 and this will now continue up to 5 April 2026.

An additional nil-rate band is introduced for deaths on or after 6 April 2017 where an interest in a qualifying residence passes to direct descendants. The amount of relief has been phased in over four years and is set at £175,000 for 2021/22.

For many married couples and registered civil partnerships the relief is effectively doubled, as each individual has a main nil-rate band and each will also potentially benefit from the residence nil-rate band.

Potentially complex calculations
The residence nil-rate band can only be used in respect of one residential property which does not have to be the main family home but must at some point have been a residence of the deceased. Restrictions apply where estates (before reliefs) are in excess of £2 million.

Where a person died before 6 April 2017, their estate will not qualify for the relief. A surviving spouse may be entitled to an increase in the residence nil-rate band if the spouse who died earlier has not used, or was not entitled to use, their full residence nil-rate band. The calculations involved are potentially complex but the increase will often result in a doubling of the residence nil-rate band for the surviving spouse.

Inheritance Tax is payable on everything you have of value when you die, including:

> Any property or land (even if they are overseas)
> Businesses you own
> Savings and investments, including pensions, shares, cash in the bank
> Trusts
> Jewellery
> Works of art
> Proceeds from life assurance policies not written in an appropriate trust
> Vehicles
> Any other properties or land – even if they are overseas

Lifetime giving – it’s good to give
There are ways to reduce the amount of IHT you pay. HM Revenue & Customs (HMRC) permits you to make a number of small gifts each year without creating an IHT liability. Each person has their own allowance, so the amount can be doubled if each spouse or registered civil partner uses their allowance.

You can also make larger gifts, but these are known as ‘Potentially Exempt Transfers’ (PETs) and you could have to pay IHT on their value if you die within seven years of making them. Any other gifts made during your lifetime that do not
qualify as a PET will immediately be chargeable to Inheritance Tax. These are called ‘Chargeable Lifetime Transfers’ (CLTs) and an example is a gift into a discretionary trust.

The taxation rules of CLTs are complicated, and you should obtain professional financial advice if you are considering a CLT. Also, if you make a gift to someone but keep an interest in it, it becomes known as a ‘Gift With Reservation’ and will remain in your estate for IHT purposes when you die.

HMRC permits you give the following as exempt transfers:

> Up to £3,000 each year as either one or a number of gifts. If you don’t use it all up one year, you can carry the remainder over to the next tax year. A tax year runs from 6 April one year to 5 April in the next year.

> Gifts of up to £250 to any number of other people – but not those who received all or part of the £3,000.

> Any amount from income that is given on a regular basis, provided it doesn’t reduce your standard of living. These are known as gifts made as ‘normal expenditure out of income’.

> If your child is getting married, you can gift them £5,000; if a grandchild or more distant descendent is getting married, you can gift them £2,500; and to a friend or anyone else you know, you can gift £1,000.

> Donations to charity, political parties, universities and certain other bodies recognised by HMRC.

> Maintenance payments to spouses (and ex-spouses), elderly or infirm dependant relatives, and children under 18 or in fulltime education.

> There are certain other gifts that can qualify for relief from IHT. These can include gifts of a small business, sole trader enterprise or partnership and shares in companies listed on the smaller, riskier stock exchange, the Alternative Investment Market (AIM).

> Farmers can also gain up to 100% relief from IHT when making gifts of certain agricultural land or farm buildings. But the rules in both these situations are complex and you’d be best to seek expert advice before gifting anything away.

> Members of the armed forces killed in action or whose death is hastened by injuries sustained on active duty are also exempt from IHT.

Life insurance policy
If you don’t want to give away your assets while you’re still alive, another option is to take out life cover, which can pay out an amount equal to your estimated IHT liability on death. Taking out a life insurance policy written under an appropriate trust could be used towards paying any IHT liability.

Under normal circumstances, the payout from a life insurance policy will form part of your legal estate, and it may therefore be subject to IHT. By writing a life insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate and will therefore not be taken into account when IHT is calculated. It also means payment to your beneficiaries may be quicker, as the money will not go through probate.

PEACE OF MIND AFTER YOU’RE GONE
Making sure that you’ve made plans for after you’re gone will give you peace ofmind. It’s not pleasant to think about, but it means that your loved ones can carry out your wishes and be protected from IHT. To discuss how we could help you to pass assets efficiently to the next generation, please contact the Farnham-based Fish Saltus team today.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING.
TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING.

INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE.

TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

Fish Saltus- 10 Tips to Reduce Inheritance Tax

How To Reduce Your Inheritance Tax Bill

10 Ways To Protect Your Estate For Your Loved Ones

Even those who believe they have moderate wealth levels may still need to take action to minimise Inheritance Tax, particularly if they own property and have savings and investments.

Inheritance Tax is payable in the UK on death, and sometimes when you give away certain assets during your lifetime. It can be a great concern for individuals with wealth exceeding the current £325,000 nil-rate band (2021/22 tax year). Naturally, you’ll want to pass on as much as possible to your loved ones, rather than paying 40% to HM Revenue & Customs (HMRC). Are you worried your family could be left with an Inheritance Tax bill after you’re gone? Here are 10 tips to pay less or avoid Inheritance Tax:

1. POTENTIALLY EXEMPT TRANSFERS
One of the better-known ways to pass on wealth free from Inheritance Tax is to gift it more than seven years before your death. Of course, there is a degree of unpredictability in the outcome. If you were to die within seven years of making the gift, Inheritance Tax may be charged, though the rate will be reduced if more than three years have passed.

2. PERSONAL GIFTS
Gifts up to a certain value can be made free from Inheritance Tax, even in the last years of your life. Your allowance includes: large gifts totalling no more than £3,000; unlimited small gifts of up to £250; and wedding gifts of up to £5,000 for your children, £2,500 for your grandchildren, or £1,000 for others Gifts made within your regular pattern of income and normal expenditure (for example, quarterly payments towards a grandchild’s school fees from your annual income) can usually be made free from Inheritance Tax, although you may need to document this pattern for three or more years.

3. CHARITABLE GIFTS
Gifts to registered charities can be made entirely free from Inheritance Tax, which can help you to reduce the size of your estate to within the Inheritance Tax threshold. Additionally, if at least 10% of your total estate is gifted to charity, it will reduce the rate of Inheritance Tax payable on your remaining estate (above the nil-rate band) from 40% to 36%.

4. INSURANCE
It is possible to take out a life insurance policy written in an appropriate trust that can provide a lump sum on your death to be used to pay the resulting Inheritance Tax bill. If this policy is within a trust, the lump sum paid out will not count towards your estate. Insurance can also be taken out when making large financial gifts to cover the Inheritance Tax bill if you were to die within the following seven years (for example, before they are excluded from your estate). This is called a ‘term assurance’ policy.

5. PENSIONS
Typically, though with some exceptions, pensions are excluded from the calculation of your estate and can be passed on free from Inheritance Tax. It is important to name a beneficiary to whom you wish to pass on your pension benefits. It is also possible to make payments in your lifetime into another person’s pension, which will protect this money from Inheritance Tax. For example, you can set up a Junior Self-Invested Personal Pension for a grandchild under the age of 18 and pay in up to £2,880 a year. But they will not usually have access to this money until they reach age 55.

6. DISCRETIONARY TRUSTS
A discretionary trust can help you to reduce your Inheritance Tax liability by holding money in the name of your beneficiaries while you retain control. You can use your nil-rate band to pay in up to £325,000, which will be excluded from your estate after seven years. Funds above the nil-rate band may attract a lifetime tax charge.

7. LOAN TRUSTS
If you would like to protect your money in a trust but need to know you can withdraw it if you need it, it’s possible to loan money to a trust. You will always have the option to withdraw the original capital you loaned, but any growth on that capital will be protected within the trust from Inheritance Tax.

8. DISCOUNTED GIFT TRUSTS
If you would like to earmark some wealth to be passed to a beneficiary or beneficiaries on your death, but you want any income generated to be paid to you in your lifetime, you can do this through a discounted gift trust. This will exclude the contents of the trust from your estate for Inheritance Tax purposes but still provide you with regular payments from it.

9. BUSINESS RELIEF
Business assets can usually be passed on either in your lifetime or after your death with Inheritance Tax relief of up to 100%. A business, interest in business or shares in an unlisted company will usually qualify for 100% Business Relief. Land, buildings and machinery related to the business will usually qualify for 50% Business Relief, as will shares controlling more than 50% of the voting rights of a listed company.

10. AGRICULTURAL RELIEF
If you own agricultural property (land or pasture used to grow crops or rear animals as part of a working farm), this can usually be passed on in your lifetime or after your death free from Inheritance Tax.

TIME TO PLAN YOUR ESTATE?
Inheritance Tax planning can be a complicated process, especially as rules and legislation seem to change every year. But with the right forward planning, it is possible to significantly reduce or even eliminate a potential Inheritance Tax liability. To identify the best ways to protect your assets for future generations, don’t delay – Contact Fish Saltustoday discuss your options.

THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE TAXATION AND TRUST ADVICE AND WILL WRITING. TRUSTS ARE A HIGHLY COMPLEX AREA OF FINANCIAL PLANNING. INFORMATION PROVIDED AND ANY OPINIONS EXPRESSED ARE FOR GENERAL GUIDANCE ONLY AND NOT PERSONAL TO YOUR CIRCUMSTANCES, NOR ARE INTENDED TO PROVIDE SPECIFIC ADVICE. TAX LAWS ARE SUBJECT TO CHANGE AND TAXATION WILL VARY DEPENDING ON INDIVIDUAL CIRCUMSTANCES.

Inheritance Tax 2021

Inheritance Tax Planning

Don’t leave less money behind for your loved ones

Effective estate preservation planning could save a family a potential Inheritance Tax bill amounting to hundreds of thousands of pounds. Inheritance Tax was introduced in 1986. It replaced Capital Transfer Tax which had been in force since 1975 as a successor to Estate Duty.

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