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Guest Blog - BRI Wealth Management Plc


Ten tips for minimising IHT

 

Estate planning is a tricky topic to discuss because it involves facing death. People who have worked hard throughout life to protect their families and to pass on their wealth often put off the discussion.

 

The government’s decision to freeze the Inheritance Tax (IHT) threshold at £325,000 until 2017/18 has resulted in an increasing number of people finding that they fall into the IHT bracket.

 

Estates will pay tax at 40% on the value of the estate over the threshold (or double the threshold for couples). This can be compared with the US where the threshold currently stands at £3.2m (just under $5m) and yet is still the source of considerable political controversy.

 

HMRC recently reported that IHT receipts during the 2014/15 tax year reached £3.8bn and predict that this will keep rising with an expected total of £5.8bn to be collected by the Treasury in 2018/19.

 

It is not surprising therefore that an increasing number of people are looking into their estate planning options.

 

Here are some tips that can help you avoid the pitfalls that surround IHT:

  • Write a Will

 Setting up a Will should be the first step. This ensures that matters are not only dealt with in a tax-efficient way, but makes sure that your wishes are carried out. Having a Will means that you avoid relying on intestacy rules that come into play where there is no Will, where effectively, the law decides what happens to your estate. It is particularly important to consider Wills for those who aren’t married but do have children.

  • Checking that you have an IHT liability

 It may sound obvious, but it is worth considering when IHT actually applies. Each individual has a tax-free allowance of £325,000, known as the nil rate band. IHT only applies to the value of the estate above this at a rate of 40% on death.

 However, transfers between husband and wife are exempt from IHT; therefore, if the nil rate band is not used on first death, this means that the value of the estate on the second death that will be exempt from IHT doubles to £650,000.

  • Take advantage  of exemptions 

You can give away up to £3,000 a year, which is known as your annual allowance; and this will be immediately exempt from IHT.

Wedding gifts up to £5,000 for parents, £2,500 for grandparents and £1,000 for everyone else are eligible as well, as are donations to qualifying charities.

 Gifts worth more than the annual allowance are also exempt as long as you survive for seven years from the date of the gift. These are known as potentially exempt transfers.

 Gifts to charity are exempt from IHT. If you give 10% of your net estate (total estate less the nil rate band), then the rate of IHT that applies to the remaining estate falls to 36%.

  • Making gifts out of excess income

 You can make gifts out of income free from IHT. They must be made out of income and they cannot reduce your standard of living.

 It is vital that you keep good records both of the gifts made and of your normal expenditure.

  • Identify assets that can be given away free from Capital Gains Tax

 Should you hold assets that have fallen in value since purchase (property, quoted shares etc.), then they could be gifted without attracting Capital Gains Tax.

  • Consider Life Cover 

One of the simplest ways of providing funds to pay part or all of your IHT liability is to establish a Whole of Life insurance policy. The proceeds from the policy are paid into a Trust, where the money is exempt from IHT and available for your beneficiaries to pay the tax due. The funds will be available to pay the tax without waiting for grant of probate. 

  • Use Trusts

 It is possible to gift an amount up to the nil rate band of £325,000 per individual into a discretionary Trust (double this for a married couple).  This can then be repeated every seven years.

More can be gifted into a Trust; but anything above the allowance would incur a lifetime transfer tax of 20%.

 Additionally, Trusts give continuing control.  The assets are ring fenced and protected from former spouses and creditors.

  • Retaining a benefit

 

The gift would still be treated as part of the donor’s estate for IHT purposes – for example, a holiday home in the parents’ name that is given to the children, which the parents visit regularly 

In general, the ‘gift with reservation of benefit’ rule prevents an asset being given away during a person’s lifetime, while allowing continued use or enjoyment of that asset. 

  • Preserving access to income 

It is possible to preserve access to income while gifting the right to capital by taking advantage of specially designed Trusts. These Trusts potentially provide an immediate IHT saving on the gift into Trust, with the remaining capital being exempt after seven years, while retaining a right to income.

  • Looking into Business Property Relief

 It is possible to invest in certain unquoted companies that are exempt from IHT after 2 years. This requires careful advice and planning due to the higher risks involved with this kind of investment.  

IHT planning is a process that should never end. It should begin when there are assets, partners or children and should evolve and become more sophisticated as life progresses.

Without a crystal ball it is impossible for us all to predict what may change, over even the next five years.   Families change, health changes, tax changes and the law changes. The recent changes in pension legislation are testament to that (more on that in our next newsletter). The goal is to plan as much as you can for the future and review your circumstances periodically to ensure that you are as happy as you can be with that planning.

Our Financial Planners would be pleased to provide advice on any aspects of Inheritance Tax Planning

 

To see BRI's newsletter please see this link http://www.brigroup.co.uk/news/groups/2015/07/ 

 

For more information contact Vince Hopkins at BRI on vh@brigroup.co.uk

Added: 28 Jul 2015 15:40


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