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It is never too early to get started on planning ahead for the future, and considering planning for Inheritance Tax (IHT). Having a plan in place will not only ensure your affairs are structured in the most tax efficient manner, but also allow you to optimise and consider your estate position and possible investment options
How can I help prepare for IHT and make sure my will is up to date?
The cornerstone of any effective IHT planning is your Will. It is important that your current Will is up to date and in line with your future wishes.
A review of your Will can help to ensure that all details are correct and there are no misstatements which may lead to parts of your estate not being administered as you intended. Failure to do so can also have an adverse effect on your inheritance tax position and the amounts chargeable to inheritance tax.
If you do not have a Will in place, we would advise taking the time to create one and therefore minimising the risk that the State will determine how the assets are distributed on death under the intestacy rules (a form of heirship).
What should I be considering when thinking about my IHT?
It is never too early to get started on planning ahead for the future. Having a plan in place will not only ensure your affairs are structured in the most tax efficient manner, but also allow you to optimise and consider your estate position and possible investment options.
Gifts of up to £3,000 per year can be made on an IHT free basis. The limit increases to £6,000 if the previous year’s annual exemption was not used. A married couple can therefore make IHT exempt gifts totalling £12,000 per tax year. This simple technique could save a possible IHT bill of £4,800 in the event of your untimely death. You should also consider using other annual gifts such as gifts in consideration of marriage or £250 small gifts.
There is an exemption for making regular gifts out of income of any size where certain conditions are met. This exemption means that sizable gifts can potentially be made but in a way that the gifted amounts instantly fall outside of your taxable estate upon death (rather than waiting for a seven-year period).
This is a valuable IHT relief which may apply to exempt or partially exempt business property on death. BR is an important part of succession planning but, due to the complexity of the BR rules, the relief may not be due even though you expect to meet the conditions.
It is important to regularly review your BR position to ensure that it continues to apply and that your business activities do not jeopardise your BR position.
Key changes to the taxation of pension death benefits were introduced in 2015. These changes can allow an individual to pass on their pension pot from generation to generation in a tax efficient manner.
Since then, if death occurs before the age of 75, the pension fund can be passed on tax-free to a beneficiary. If death occurs after 75, the fund can be drawn by a beneficiary at their own marginal rate of tax. A beneficiary will have the option to receive the death benefits either as a lump sum, drawdown, or an annuity. The definition of a beneficiary is much wider than that of a dependent, allowing considerable freedom in choosing who you want to benefit from your pension fund.
If death benefits are paid as a lump sum, those benefits would form part of a beneficiary’s estate. Therefore, an efficient way to pass on death benefits is to consider ‘dependents drawdown’. This would allow the beneficiary to continue to enjoy the tax advantages associated with investing in a pension, whilst allowing them to draw income as and when required. The fund could then be used as a further legacy for them to pass on to their own beneficiaries.
It is important that death benefit nomination forms are reviewed as individuals who you want to have the option to benefit from dependents drawdown will need to be included on these. In our opinion, pensions should be considered in the context of IHT and alongside any Will planning. It is also important to review whether your pension scheme provides for those flexibilities.
Should I consider a Family Investment Company (FIC)?
A FIC can be used to hold a wide variety of assets including property and stocks & shares. It is a flexible investment vehicle that allows a family to determine how each member can benefit by defining the rights attached to each class of shares. If the company is correctly structured it allows the principal to retain control of the company by way of holding voting rights, however, allows the beneficiaries, usually the settlors children, to hold income and capital growth shares. The effect is to remove the capital growth value of the company from the principal’s estate and pass this onto the beneficiaries, in turn reducing the total IHT that should be payable on death.