With careful planning inheritance tax can often be reduced or nullified. There are a number of ways to help mitigate Inheritance Tax (IHT) using annual allowances, discounted gift trusts, whole of life contracts and gifting. Individuals will be advised about the different strategies. (Please note - The Financial Conduct Authority does not regulate tax)
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The allowance for individuals currently stands at £325,000 and this is taxed at the Nil Rate Band. If you are married or are in a civil partnership, then this Nil Rate Band if effectively doubled to £650,000. The expression Nil Rate allows the Government to actually put a ‘rate’ on this amount without an act of parliament.
The residence nil rate band was introduced in April 2017. It is a £100,000 allowance for passing on the family home to direct descendants, increasing to £175,000 over the next three years. The allowance reduces for larger estates. This can be added to the £325,000.
The tax bill would have to be settled before the estate is transferred to the beneficiaries. An individual’s estate is the total worth of any properties, vehicles, valuables and any gifts - it is important to review your position each year as assets like investments and property can change in value.
There are other ways in which to reduce the value of your estate such as:
• Charity donations - You can give money tax-free to charity whilst you are alive or in your Will. You can also cut the percentage of the tax charge on Inheritance Tax if you leave at least 10% of your estate to a charity in your Will.
• There are some gifts you can make to family or friends (or indeed anyone who is not your partner) which will reduce the value of your estate. But there are strict limits:-
1. a maximum of £250 per year to any one person
2. a maximum of £3,000 in total gifts per year
3. a wedding gift of up to £5,000 for your child and their partner
4. a wedding gift of up to £2,500 for your grandchild and their partner
5. a wedding gift of up to £1,000 for anyone else
You can give away any amount of cash or assets you wish and provided that you live seven years, these assets would be outside of your estate. If you were to pass away within this seven year time scale, then inheritance tax would still apply but on a sliding scale. This is called a Potentially Exempt Transfer (PET).
Another way of planning for an inheritance tax liability is to use a whole of life policy. This is where we calculate your likely inheritance tax libility and effect a life policy for that amount, this will pay out on death and that amount can to be used to pay the tax bill. So if the tax was £50,000 then the life policy would pay out £50,000.
Another important vehicle when planning IHT is a Will. The Nil Rate amounts can be enhanced if someone dies. Take a husband and wife - the wife dies leaving her estate to her children - the children lend the husband the deceased wife’s estate at an interest rate each year. If the wife’s estate amounted to £300,000, the husband still has the 'use of the wife’s estate', however, the children are charging, for example, 5% for the ‘use of their mother’s estate’ so each year £15,000 debt would be against the husband’s estate. Assuming the husband lived for another 10 years, he would have his tax allowance whatever it is at that time, plus 10 x £15,000 as a debt against his estate. If the Nil Rate tax band stays the same, £325,000 + £150,000, the husband would have £475,000 to pass on to his children without them incurring any IHT.
Levels basis and rates of tax can change without notice and these will depend upon your personal circumstances which can also change.
This allows the investor to maintain a withdrawal (income) and have the capital in a Trust for beneficiaries. The withdrawals have to be maintained for the life of the Trust and the investment vehicle must be an Investment Bond. The attraction with the DGT is that depending on the age at setting up, plus getting the investor underwritten, an extra ‘discount’ on the investors estate can be achieved for IHT purposes.
£100,000 invested – Settlor one is aged 62 and settlor two is age 60.
The discount would be around 65%. In other terms £65,000 would be deemed to be outside of their estate, meaning the actual gift would be £35,000 for tax purposes. After seven years, the whole amount is outside the settlor’s estate. The regular withdrawals would be £4,000. Again, the discount would depend on ages and how healthy the investors are.
A Loan Trust is where you loan a trust a sum of money which is to be repaid, normally using an investment bond. This arrangement has a minimum of a 20 year time scale. If you invested £100,000 in to a Loan Trust, the trust would pay you back 5% per year - £5,000. Over the 20 years, the loan will be fully repaid and any growth the £100,000 has made over the 20 years is outside of the estate. If you were to pass away before the loan was repaid, then the remainder of the loan would form part of your estate. Loan Trusts are normally used for relatively young clients due to the minimum 20 year time scale, with an inheritance tax problem that requires income.
Whole of Life Policy
Another way to resolve an inheritance tax issue is with a whole of life policy. This policy is a life assurance contact that pays out on the death the life assured and the proceeds are then used to pay the inheritance tax liability. This policy must be set up in a trust so is outside of the estate on death.
If you wish to review trusts and your overall finances - Call us on 01752 896943 and we can help
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The Financial Conduct Authority does not regulate Will Writing, Taxation or Trust Advice.