Inheritance Tax & Estate Planning

The high rate at which Inheritance Tax (IHT) is charged gives many families a shock, so it’s well worth doing what you can to take advantage of the relevant tax reliefs and allowances available to you.

The nil rate band has not kept pace with increases in wealth over the longer term, which has led to more families paying IHT, and in greater amounts.

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Current Situation

• The nil rate band (NRB) is £325,000 and is frozen until 2028

• The tax rate is 40% on all taxable assets above £325,000

• An additional residence allowance (RNRB) became effective from April 2017, it is now £175,000 and also frozen until 2030

The RNRB will sit alongside the NRB, but only if the qualifying criteria is met and either funds or the home is left to a lineal descendant.

• The extra nil-rate band will also be available when a person downsizes or ceases to own a home after 8th July 2015 and assets of an equivalent value, up to the residence nil-rate band, are passed on death to their direct descendants

• For estates with a net value of more than £2 million, the residence nil-rate band will be withdrawn at £1 for every £2 over this threshold

IHT Issues

Many issues are often misunderstood when it comes to IHT planning. For example, ISAs are sometimes missed as they are thought to be tax efficient. Although this is true during life on death this is often not the case, as they cannot be held in trust.

For many clients the family home could be the largest part of their estate. This is also often the most difficult asset to plan around, as gifting without either moving out of the house and surviving seven years, or paying a full market rent and surviving seven years are the only options.

• Potentially all your assets are at risk

• Including ISAs and the family home

• Domicile determines liability

• All of your assets are potentially liable to IHT, wherever they may be situated:

• Previous gifts may be included

• Potentially exempt transfers (PETs)

The Good News

There are allowances and reliefs available, these are some of the main reliefs and allowances a client may have available to offset an IHT liability as per the points above:

If you leave all your estate to your spouse or civil partner, there is no tax to pay. The first £325,000 of your estate that you leave to anyone else is also tax free.

If your home is included in your estate and you pass it onto your children, grandchildren or other lineal descendants, the tax-free threshold increases to £500,000 per person, as long as the estate is worth less than £2 million, and the value of your home is in excess of £175,000 (single) and £350,000 (marriage/civil partnership).

When your partner dies, your allowances can be combined – meaning up to £1 million can ultimately be passed on tax free. You and your spouse or partner can each gift up to £3,000 per year, which will be deducted from the value of your estate.

This £3,000 allowance can be carried forward if you didn’t use it last year – giving a limit of up to £12,000 for a couple for this tax year. You can also make larger gifts but they generally take seven years to be exempt from IHT.

Gifts to charity are unlimited

Regular Gifts from income – so long as it does not have a negative impact on your own standard of living are also unlimited.

• Gifting can reduce the value of your estate

• Beware of gifts with reservation of benefit

• The 7-year rule for gifts

• Certain businesses, woodlands, heritage properties and farms may qualify for relief

A good way of reducing IHT bills and protect your family wealth is to make the most of your gifting allowances. You can give cash gifts to your loved ones every year that won’t be counted as part of your estate for tax purposes. This is an effective way of passing on as much of your wealth as possible.

There other options available to effectively transfer your family wealth but, it requires careful planning. If you would like to find out more, get in touch.

Although the tax-free allowance of £325,000 per person may seem generous, the 40% rate at which IHT is paid on the rest of your estate is not, subject to otherallowances being available.

Common reasons not to plan

• “I don’t want to give my money away yet.”

• “Lack of access and control.”

• “I need income from my investments.”

• “Lack of potential capital growth.”

• “Assets tied up in main residence”.

• “Age/health prevents.”

• “7-year timeline is too long.”

• “Alternatives structures high risk/too complicated.”

• “The government may change the rules.”

Inheritance Tax concerns

• Access – Don’t want to lose access or control of money

• Time – Feel seven-year solutions take too long

• Complexity – Do not understand complicated IHT structures

• Risk – Concerned about risk

• Income – Require an income to maintain lifestyle

There is no off the shelf solution to an IHT problem. There are many different solutions, each with advantages and disadvantages. Only by taking advice can a client find the solution or combination of solutions that fit both their estate and their concerns.

How can we help?

Initially by listening to your goals and aspirations and how you picture the rest of your life.

Once we have gathered the required basic information from you, we will set to work;

1. Collating all the wider information, assessing the suitability and costs of any existing investments, and carrying out the required calculations in order to put together your bespoke plan to help you achieve your goals.

   
   

2. Produce a detailed cash-flow model following an in-depth analysis of your income and expenses which will clearly visualise your financial journey towards your goals.  

   
   

3.  Implement the plan.

   
   

4. Once in place, we will monitor your investments and ensure everything is operating in line with your goals and objectives.

   
   

5. Our periodic reviews allow us to assess any changes to your circumstances or goals, as well as any market or legislative updates, and then to adjust the financial plan accordingly.

   
   

6. And critically be flexible enough to respond to the changes and challenges that life throws our way.

   
   

Take a closer look at: www.xvwealth.co.uk

Get in touch: info@xvwealth.co.uk

The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change and their value depends upon individual circumstances.

The Financial Conduct Authority does not regulate Inheritance Tax Planning and Estate Planning.