Estate Planning - Starting to Plan
Estate planning preventing potential inheritance tax issues by various methods.
Estate Planning - Starting to Plan
There are many ways to mitigate a potential inheritance tax problem and we aim to find the most suitable option for your needs. The simplest way to avoid Inheritance tax is to give your money away at least seven years before you die. This however, is easier said than done as most of us don't know and don't want to know when we are likely to die. For those in the difficult position of knowing that their life expectancy is limited; gifting is not very useful as it takes seven years before an absolute gift is considered completely outside your estate.
As an Exeter based IFA, we can help with planning your estate so why not give our team at My Money People a call today.
There are a variety of ways to set up a trust and we don't propose to try to cover all eventualities here.
One thing you should be aware of when setting up a trust is tax.
Gifting too much money into trust can cause an immediate tax liability as gifts into trust are not immediately exempt from inheritance tax.
Gifting assets such as shares or a property would class as a disposal and may cause a Capital Gains Tax liability for the donor.
Gains and Income on some investments in a trust are subject to the highest tax rate charged by HMRC, currently at 45%.(2020/21 tax year)
On some trusts the trustees are responsible for the tax to be paid within the trust and for others it is the beneficiary.
You can see that reducing your inheritance tax requires careful consideration and guidance. The rules in relation to inheritance tax are also a political football frequently kicked around by all the parties. In the last few years we have seen the nil rate bands go from rising annually to allow for inflation to being frozen at £325,000 . We have also seen the introduction of the nil rate band allowance transfer between spouses alter the way wills are written and how we plan for reducing inheritance tax.
In April 2018 we saw the introduction of the main residence nil rate band. This additional allowance is planned to increase from £100,000.00 in 2018 to £175,000.00 improving our ability to mitigate inheritance tax.
When considering how to plan for the impact of inheritance tax on an estate, the investor may wish to involve some or all of the beneficiaries, especially where trusts are established. Also, Grandparents leaving money for their grandchildren may wish to involve their children as trustees, so as to ensure continuity should something happen to them.
It is important to remember that it is not always possible to completely remove the risk of inheritance tax and that any decisions made should not ultimately be to the detriment of the investor who, after all, may live for many years into the future and need financial support, especially when it concerns long term care. Paying for this and so reducing the value of your net worth, is one way that inheritance tax would most certainly be avoided.
The key element to any estate planning is to keep it simple and take advice from qualified professionals who understand the implications and will take time to understand your personal circumstances. We can take you each step of the way on your journey to understand estate planning. Our IFA team are on hand to take your call today and answer your questions.
Trusts
Like sweets there are many types, shapes and colours. However, we can sort them into three basic varieties.
Gifting too much money into trust can cause an immediate tax liability as gifts into trust are not immediately exempt from inheritance tax.
Gifting assets such as shares or a property would class as a disposal and may cause a Capital Gains Tax liability for the donor.
Gains and Income on some investments in a trust are subject to the highest tax rate charged by HMRC, currently at 45%.(2020/21 tax year)
On some trusts the trustees are responsible for the tax to be paid within the trust and for others it is the beneficiary.
The advantage of a Trust is that you can personalise the investments to match your attitude to risk (ATR) so they are suitable for people with a lower investment risk tolerance. You might feel that you can't do anything about IHT because you need your capital to provide for you. Trusts have a range of features that allow return of capital, either as one-off lump sum, regular lump sums or as a monthly income. It is very much a case of finding the right Trust for you. They have one additional feature that is often overlooked. Taking an income a return of capital can reduce your income tax from 20, 40 and 45% to zero during your lifetime by deferring tax until you have passed away. At that stage tax may be due based on the beneficiaries' tax status and how it is managed on exit from the trust investment.
Trusts typically start from around £50,000 and can be funded from cash or existing investments including ISAs, pension commencement lump sums and investment bonds.
Please note: Tax treatment depends on an investor's individual circumstances, and it may be subject to change.
Speak to our Exeter IFA team to find out more about trusts.
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