Inheritance Tax Planning - A Voluntary Tax?
A recent study by Canada Life found that only 27% of people in the UK with assets that exceed the current inheritance tax (IHT) threshold of £325,000 have consulted a financial adviser regarding their IHT planning.
With the average price of a semi-detached property in St Albans in 2016 at £619,827 [Source: Rightmove], people are going to increasingly find that their estate is over the IHT threshold.
From our conversations with clients we have found that there is a great deal of confusion surrounding Inheritance Tax Planning (IHT), here are some key facts, which are correct as of the 2016/2017 tax year:
• Transfers to spouses or civil partners are exempt from IHT
• If you make a gift and survive 7 years there is no IHT on death.
• Individuals are able to pass on £325,000 tax free on death to other beneficiaries
• This allowance can be used by the surviving partner on second death (if it was unused) so a married couple or registered civil partners have a nil rate band of £650,000.
• If the total estate exceeds this threshold then tax is paid at 40%.
• However, if 10% or more of the net value of the estate is left to charity, then the tax reduces to f 36%
• Money that is donated to a charity, museum, university or community amateur sports clubs from the estate will not be subject to IHT
Over the years we have discussed IHT planning with many of our clients and there are four reasons why people don’t plan for IHT, which seem to crop up time and time again. Here we address those myths…
#1 “I might need to spend the money before I die”
Many people are concerned that IHT planning would ‘lock away’ their money, so if they needed to access it, for care home fees or home improvements for example, they would be unable to do so. For clients that want access to funds, we would discuss the option of investing in a specialist IHT investment that qualifies for Business Protection Relief (BPR).
BPR qualifying investments always form part of your estate and therefore you have access to the capital at anytime, however if you have held a BPR qualifying investment for 2 years prior to death, and at death, the investment is exempt from inheritance tax – saving you 40%.
#2 “I require an income from my assets”
An asset that provides income is typically held within an individual’s estate and would therefore be subject to IHT. However it is possible to invest via a particular type of trust called a Discounted Gift Trust (DGT) which would provide a solution.
The effect of a DGT is it allows and individual (or couple) to make an investment into a trust. Part of that investment is immediately exempt from IHT and the balance falls outside the estate after 7 years. However the trust allows you to set up a regular fixed withdrawal from the investment for the remainder of your life. After 7 years you will continue to receive a regular withdrawal and the entire investment will not be subject to IHT on death.
#3 and #4 “I’m worried my son/daughter will get divorced” and “I’m concerned my son/daughter will blow the money”
One of the main concerns that we hear from people surrounding IHT planning is that they are worried about losing control of their funds, seeing it leave the family on divorce or being blown by their beneficiaries. Why should you drive a 5 year old car when your son/daughter blows your gift on a new Mercedes?
To avoid these issues, you could make an investment in to trust. You could be the trustee and therefore during your lifetime, you decide how the money is invested and who the beneficiaries are. However once you have lived 7 years after the money is gifted in to trust, it will not be subject to IHT on death. Therefore, if your son/daughter was to divorce from their partner while you are alive, their ex-spouse would not be entitled to any of the trust and equally there would be no new Mercedes on the drive!
We hope this has cleared up any confusion you may have had surrounding IHT planning. If you have any further questions or would like to discuss your own IHT plans, then please do not hesitate to get in touch with us:
T:01727 85 22 99