Tax planning considerations for the new normal in the New Forest
Five ideas for inheritance tax planning from Lester Aldridge Solicitors
This month's Life Matters for Lymington was written by Parisa Jones in the Lester Aldridge Tax, Trusts and Wills Team. It's for people who have some assets (an "estate"), and hope to maximise what they can leave to loved ones when they die. This becomes ever more pertinent as we begin to see how taxes generally are bound to rise to pay Covid-19 dues, and will likely hit our children hard.
A little planning now could make a lot of difference later.
What is Inheritance Tax?
Inheritance Tax (IHT) is a tax that is paid on your estate after you have passed away. It is a concern for many people who want to ensure that their loved ones receive maximum benefit. IHT rules are complex but with careful planning, tax liabilities can be mitigated.
There are many ways that you can plan your estate in a tax efficient manner but, I have put together five IHT planning ideas. Please note that these options are not suitable for everyone and mitigating IHT is just part of wider estate and succession planning.
Before undertaking any IHT planning, you should always seek advice from someone who is appropriately qualified. There is no “one size fits all” option and each person’s position should be considered on a case by case basis.
It is permitted to "gift" assets right now
Gifting assets is perhaps the easiest step that you can take. You can make gifts of £3,000 in each tax year without any IHT implications.
You can also make smaller gifts of up to £250 to anyone who has not received any other gift from you. There is no limit on how many smaller gifts you make and again, there are no IHT implications.
For example, if you have three children and 12 grandchildren, you could choose to give £1,000 to each of your children and £250 to each of your grandchildren in each tax year. This means that £6,000 can be paid free from IHT.
You are of course also allowed to make larger gifts. These are known as potentially exempt transfers. If you survive for seven years then the value can fall outside of your estate for IHT purposes. However, if you die within the seven year period, the value gets brought back into your estate.
Careful consideration needs to be given when making any gift – particularly with larger gifts. It may also be necessary to update your Will in light of any gifts made. There may be other consequences to be considered, for example loss of income, loss of use and enjoyment, and any capital gains tax that may become payable."
Gifts of surplus income
"If you have surplus income, this can be "gifted" without any IHT consequences - and there is no limit on the amount that can be gifted.
However, for an eligible claim to be made, various criteria need to be satisfied.
The gift must be of surplus income, paid as part of your normal expenditure. You must also be able to maintain your usual standard of living. The Revenue will request full details of all sources of income and your annual outgoings to evidence that any gifts made do qualify.
There must be an intention to make gifts from your surplus income and there must also be a regular pattern of payments being made.
It is therefore important to keep detailed records as your Executors will have to make a claim for the exemption after your death.
Considerations for using trusts
Trusts can be set up during your life time or on death, under the terms of your Will. There are many reasons and advantages for setting up trusts. They can be a very flexible way to provide for future generations in a tax efficient manner. Trusts will also provide an element of control if you are concerned about your intended beneficiaries’ circumstances or do not wish for them to have access to large sums of money.
For example, if you are an unmarried couple with children, you may wish to provide for your partner and then leave your assets to your children. However, if you are not married, assets passing to your partner will not benefit from spousal exemption and if you own property, you are unable to claim the residence nil rate band. Your estate would be subject to IHT when you die. Your partner’s estate will then increase and will be subject to IHT again on their death, reducing what is left for your children.
Use of a trust can help mitigate any tax and, in some circumstances, substantially reduce the IHT payable.
The potential value to beneficiaries of life policies
If necessary arrangements have been made, life policies can pass outside of your estate for IHT purposes. It is therefore important to ensure that policies are written in trust and that any nominations made are up to date.
As an example, if your estate is subject to IHT and you have a life policy paying out £250,000, you could save £100,000 in tax by making sure necessary arrangements are in place.
Trusts can also be used to receive policy proceeds to provide flexibly for your family. Trusts are particularly useful with larger policies as they can be used to avoid increasing someone’s estate to then be subject to IHT when they pass away.
Utilise available exemptions
There are a number of other reliefs and exemptions available. You can therefore look to structure your estate and your Will to fully utilise these exemptions and reliefs and maximise the benefits to your estate.
In some cases, we also recommend looking at the underlying investments and obtaining financial advice.
The residence nil rate band is an allowance available based on your ownership of a residential property that you have occupied. There are various criteria that need to be met for an eligible claim to be made. In some cases, there are simple steps that can be taken to ensure that estates qualify.
If you own a business, the assets may qualify for business property relief, providing an exemption of up to 100%. However, not all business will qualify. Again, there may be steps that can be taken to improve the chances of a successful claim being made.
Some investments will enable you to qualify for business property relief – for example, shareholdings in AIM. This can provide relief on the value of the holdings of 100%.
Assets passing to charities will also be exempt from IHT. If you leave 10% of your estate to charitable beneficiaries, this can also reduce the rate of IHT payable from 40% to 36%.
The Tax, Trusts and Wills Team at LA are experienced in tax and estate planning and would be happy to assist with any queries that you have. We are able to arrange appointments by Skype, Zoom or WhatsApp as you prefer.
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Life Matters is a regular monthly feature on Lymington.com, which covers a wide range of legal subjects and is always written by one of the Lester Aldridge team. You can see a list of all published articles by clicking to the Lester Aldridge Solicitors webpage on Lymington.com here.
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