Estate Planning is the process of managing assets in the event of incapacity or death. Your possessions, property, pensions and money are all part of your estate. When leaving an inheritance you want to ensure the right people inherit your wealth and to minimise the Inheritance Tax (IHT) you pay.
IHT is payable by the executors of the estate from the estate assets. It is common for beneficiaries to pay the IHT liability so as to benefit from the assets in specie and maintain the value of an illiquid estate. For the 2019/20 tax year, estates of value in excess of £325,000 for an individual may be liable to IHT if the relevant planning is not completed and available reliefs are not made use of. If you are married or in a civil partnership, you can transfer any of their unused allowance to the estate and potentially pass on £650,000 tax free.
The right forward planning can significantly reduce or even eliminate Inheritance Tax liabilities that you or your family could be faced with. Below are some tips you can use to reduce Inheritance Tax.
Write a Will
Making a Will and keeping it up to date is a vital part of Inheritance Tax planning. Your Will will determine who will benefit from your estate. You need to appoint an executor of your Will who will be responsible for ensuring the Inheritance Tax bill is paid out of your estate.
Having a Will in place avoids your beneficiaries having to deal with the rules of intestacy and means your estate is distributed how you wish.
Please note that the writing of a Will involves the referral to a service that is separate and distinct from St. James’s Place. Wills are not regulated by the Financial Conduct Authority.
Give money away
Lifetime gifting can be used to gradually reduce the taxable value of your estate over time. Gifts are typically made directly to the receipient. Gifting can be for a specific purpose such as paying for education or a house deposit or be used to simply pass savings onto loved ones.
A gift can be anything that has a value such as money, property or possessions. It is also a gift if an asset is transferred to someone else for less than it is worth. In each tax year, you can give away up to £3,000 in gifts without incurring Inheritance Tax, this is known as an annual exemption. This can be split between as many people as you like and can be assets or cash. If you do not use your exemption, you can carry it forward for one year. For example, a couple can gift up to £12,000 in a tax year, if neither utilised the allowance in the previous tax year.
Put assets into Trust
Trusts allow you to set money aside for family or loved ones. Trustees, in accordance with the provisions set out in the trust, can appoint assets to the beneficiaries. Trusts give you control over the money and when you set up the Trust, you can choose when they receive the gift.
At Four Wealth Management, your Financial Adviser will consider if using a Trust is right for you. A Trust is a separate legal entity from outset. Assets can be placed outside of the individual’s estate by making use of a trust, which means you are no longer their owner (the trustee is).
The assets are therefore not part of your estate. Assets gifted to trust in excess of the annual exemption will form a Potentially Exempt Transfer or Chargeable Lifetime transfer dependent on the type of trust used and may not be subject to IHT assessment after 7 years from the date of the gift. Gifting of assets to trust is complex and may trigger a during your life IHT charge, or be assessed for IHT even after 7 years has lapsed from the date of gifting, and your financial adviser will be able to assist you in ensuring such implications are averted.
Trusts are not regulated by the Financial Conduct Authority.
Use a pension to reduce Inheritance Tax
Pensions sit outside of your estate and therefore are not liable to Inheritance Tax. This means that pensions are usually a good way to pass money onto your loved ones. If you die before the age of 75 and have started withdrawing money from your pension through drawdown, your pension will pass onto your beneficiaries free of tax. If you die after 75, tax is paid at the marginal rate of income tax of your chosen beneficiaries.
Take out life insurance
A life policy can be setup and transferred to trust so that it is outside your estate. The policy held in trust will pay out the proceeds to the trust which the trustees, in accordance with your wishes and the provisions set out in the trust, can appoint to the beneficiaries. As the proceeds are payable to the trust and not your estate they will not be assessed with the assets in your estate for IHT.
It is common for trustees to appoint trust assets, in this case the proceeds of a life policy, to a beneficiary so that the IHT liability on your estate can be settled by that beneficiary.
The lump sum can also be used to pay the Inheritance Tax bill. This reduces stress on your beneficiaries as it means they do not need to sell assets to cover the Inheritance Tax bill.
Start Inheritance Tax planning today
The sooner you begin your estate planning, the more options you have available to you to reduce the size of your estate over time in order to reduce your Inheritance Tax liability.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.