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The ultimate guide to your estate planning needs and reducing IHT

Protect your assets from financial predators with these IHT strategies….

Ensure that your estate benefits who you want it to and not any inadvertent heirs, such as HMRC..

Understand estate planning and what your needs and objectives are. Remember, no estate planning is the same because all estates are different.

So, let’s start at the beginning….

Well, to begin with it all comes down to understanding inheritance tax (IHT) and what your needs and objectives are. There is no right or wrong way - no estate planning is the same because all estates are different.   However your estate is made up and whatever the value - which will be the collective amount of all liabilities and assets, such as shares, property, cash, capital etc – your capital could be at risk from numerous threats.  These financial predators can come in various different forms and could include commercial creditors, relationship breakdowns and of course the taxman!!

REMEMBER - All could risk damaging your estate…

It is always advisable to have your estate planning in place, before any ‘need’ materialises, as there is not often the opportunity to make quick, responsive and effective changes, as situations can often change rapidly.

In days gone by, inheritance tax (IHT) was seen as only concerning the ‘super wealthy’, nowadays, however, with IHT at 40% (at its lowest level ever) it is one of the stronger threats to the wealth protection of the inter-generational.  Looking ahead, it is probable that HMRC will look to constrict the IHT rules by either refocusing or restricting the usage of specific reliefs.  This means that it makes sense to use the reliefs while they are still available. 

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Estate Planning Handbook

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The most important 3 steps…

The 3 steps below will help you to shelter your estate both effectively and legitimately and help identify what estate planning is required.

So, let’s begin….

Step 1: Understand what your goals are

Basically, look at what you want your estate planning to achieve.  It may be that tax planning is not your main concern, it could be, for example about ensuring that an asset of sentimental value remains in the family. 

By being clear on what you want to achieve, you will be able to successfully plan your estates needs.  Included could be:

  • If you are unmarried, looking at ways to reduce your partner’s IHT liability.
  • Ensuring that your children’s inheritance is sheltered from a breakdown of a relationship or bankruptcy, following your death.
  • Protection of either all or part of your estate for intended beneficiaries or future generations.
  • Preventing your estate from IHT ‘double taxation’ when your children pass on the estate to their children.
  • To put in place some form of IHT relief by way of property investment activity restructuring.  
  • Ensuring that the inheritance of children from a previous relationship is protected.

Next is…

Step 2: Tax efficient planning

Generally, tax planning is about getting the right equilibrium between protecting your assets from tax responsibilities yet still keeping an adequate balance on the level and control needed to maintain your particular lifestyle choice

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As one would imagine, more often than not, a structure that is tax efficient is likely to be less accessible. 

Let me explain about the key estate planning strategies..

Listed below is a summary of the main estate planning devices:

Wills – this is an efficient means for assets to be transferred to intended beneficiaries upon death.

It is always advisable to write a will, even if it is only to avoid dying in intestate.  Whereby, an estate is complex or holds a lot of value, it is recommended to seek specialist advice, even more so if assets are held in multiple jurisdictions.  Once having made a will it is important to remember to keep it up to date and ensure that it remains fit for purpose.

Gifting – seen as a way of disposing of assets in a tax efficient manner before death

The size of an estate can be reduced by transferring accumulated wealth to beneficiaries.  Specific types of gifts are automatically IHT exempt, these include those gifts made within the yearly £3,000 exemption and those for the purpose of maintaining dependants. 

Trusts – these can protect assets and share the wealth benefit without having to give up ownership.

The benefit of a discretionary trust is that it provides both control and flexibility over the received benefit and the beneficiary.  Providing that death is not within seven years of the setting up of the trust, then the assets will be classed as being outside of the estate.   The investments growth value is inside the trust, but remains outside of the taxable estate.  

You might be wondering about Companies and Partnerships..

These are often used as a trust alternative.  They have the flexibility of a trust but not the same tax implications. 

Basically, the basis of estate planning is to provide protection from outside actions and threats.  Generally, it is unlikely that one strategy will satisfy all of an individual’s estate planning requirements.

It is important to….

Seek advice on what options are available and how they would be suited to your specific requirements.

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Broadly speaking, these could include:

Business property

Of all the reliefs available for purposes of inheritance tax, one of the most substantial is Business Property Relief (BPR).  As it is fairly complex, the bottom line is that if a qualifying interest is held by an individual within a trading business, then the likelihood is that it will be 100% IHT exempt. 

Another example where BPR could apply is…

Where there is a shareholding (where the shares have been owned for over two years) within an unquoted trading firm.

However,

It is also possible for an individual to venture out into the retail market to seek portfolios that are eligible for this relief to invest monies into

Then there’s...

Property with agricultural usage

A similar relief to BPR is Agricultural Property Relief (APR), this can apply to land used for agricultural purposes.

And don’t forget the Nil rate band and double nil rate band..

The double nil rate band is whereby the partner who passes away first, transfers their complete estate to their partner upon death.  This means that when the second partner passes on, the estate will benefit from both party’s nil rate band. As from October 2017, this totals to £650,000 at 0%.  This is advantageous to spouses and civil partners. 

And if that wasn’t enough, there’s the Residence Nil Rate Band (RNRB)

When a person’s home passes to a ‘direct descendant’, the first £100,000 of value of the home is exempt from Inheritance Tax, this came into effect from 6 April 2017 and is known as the Residence Nil Rate Band (RNRB).   Because of over-engineering, this simple relief has become needlessly complex.

The idea is that each year, until 20/21, the threshold will increase by £25,000 until it reaches £175,000.  It is probable, however that the life expectancy of this relief could be rather short. 

The remaining value of the property and assets within the estate are then able to have the normal NRB applied.

Don’t forget..

For high value estates, RNRB does taper away.

But, how can trusts save me money?

For years the use of trusts has been to shield assets from financial predators.  The tax advantages from having a trust, is that generally speaking, the individual creating the trust has already made the decision to gift the asset.   If the asset stands at a gain, then an IHT charge (this can usually be disregarded if the donor does not pass away within seven years of making the gift) along with CGT implications could apply. Other tax implications could be applicable, dependant on circumstances and type of asset.

Let me explain how…

When assets are being transferred to a standard family trust, the same taxes need to be taken into account. If an asset surpasses the nil rate band (as is not eligible for any reliefs such as BPR), when transferring to a trust, an immediate 20% IHT charge will be applicable on the excess.  Providing the donor does not pass away within the seven years, no further IHT will apply.  If, however, death does occur within the seven years, then the likelihood is, that an additional 20% IHT will be due.

The asset value, once in the trust, should not fall inside the estate of any individual.  Trusts are subject to their own specific regimes, such as paying 6% IHT each 10-year anniversary or when capital is removed from the trust.

And like I said….

When an asset is transferred to the trust, from the view of Capital Gains Tax, it is classed as a disposal with the asset remaining at a gain.  This is no different for an outright gift.  Gains resulting from asset transfers, could be deferred, disparate to that of an outright gift (whereby for such treatment to be received it must be a business asset).

No CGT issues should arise when cash only is being transferred.

Sometimes, employer trusts can be used to transfer assets IHT or CGT free.  This however, would depend on the objectives and circumstances, but could be beneficial for family investment companies.

So, what about family investment companies and family partnerships?

Over the last decade because of penal IHT charges that can apply on the transfer of investment assets to family trusts, there has been an increase in the usage of other vehicles. 

And what’s more…

Family companies can be used where the transferable asset is cash. The reason for this is that when cash is transferred to a company there are no Stamp Duty or CGT issues.  Chargeable assets however, would generate a CGT charge and a property transfer a Stamp Duty charge.

Different classes of shares will be created by the family investment company, which will have different rights to capital, voting and income.  In the case where the shares are gifted to family members, then tax on the value of the gift should only apply if the donor passed away within seven years of making the gift.

How about Partnerships (including Limited Liability Partnerships (LLP’s) and Limited Partnerships (LP’s)?

These are quite often used by families seeking to shield their assets. These are more preferable for the transfer of assets.  This is because Partnership rules tend to be more favourable to Stamp Duty and CGT purposes. 

And don’t forget - Pension schemes

From a tax perspective, pension schemes are seen as being very efficient upon death.  These must be taken into account when estate planning as they can be potentially an extremely valuable asset.

Step 3: Keep your planning updated

Not only will circumstances, assets and liabilities change, so will the estate taxation rules.  It is imperative to regularly review any estate planning not only to keep it in line with the wishes of the individual but also to keep it legal and valid. Is your estate planning up to date or is it something you have been avoiding?

Plan today for the generation of tomorrow....

Sarah Aubert