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SAFEGUARDING YOUR WEALTH: STEPS TO HELP
MITIGATE AGAINST INHERITANCE TAX
by Sam Hulson of First Equitable
Unforeseen life events and circumstances can potentially impact your
finances in a number of ways. We can help you to safeguard your wealth
for future generations. But for many of us, there can be a remarkable gap
between our intentions and our actions.
TACKLING IHT SOONER RATHER THAN LATER
There are legitimate ways to mitigate against IHT, which is why it is
sometimes called the ‘voluntary tax’. Unfortunately, some of the most
valuable exemptions must be used seven years before your death to be fully
effective, so it makes sense to consider ways to tackle IHT sooner rather than
later and to seek professional financial advice.
STEPS YOU CAN TAKE TO MITIGATE AGAINST IHT
MAKE A WILL
Dying intestate (without a Will) means that you may not be making the
most of the IHT exemption that exists if you wish your estate to pass to your
spouse or registered civil partner. For example, if you don’t make a Will, then
relatives other than your spouse or registered civil partner may be entitled to
a share of your estate – and this might trigger an IHT liability.
MAKE LIFETIME GIFTS
Gifts made more than seven years before the donor dies to an individual or
to a bare trust are free of IHT. So, if appropriate, it could be wise to pass on
some of your wealth while you are still alive. This may reduce the value of
your estate when it is assessed for IHT purposes, and there is no limit on the
sums you can pass on. You can gift as much as you wish, and this is known
as a ‘Potentially Exempt Transfer’ (PET). However, there is a catch: if you
live for seven years after making such a gift, then it will be exempt from IHT.
But should you be unfortunate enough to die within seven years, it will still
be counted as part of your estate if it is above the annual gift allowance. You
need to be particularly careful if you are giving away your home to your
children with conditions attached to it; or if you give it away but continue to
benefit from it. This is known as a ‘Gift with Reservation of Benefit’.
LEAVE A PROPORTION TO CHARITY
If you leave at least 10% of your estate to a charity, then your IHT liability on
the taxable portion of the estate is reduced to 36% rather than 40%.
CONSIDER SETTING UP A TRUST
Family trusts can be useful as a way of reducing IHT, making provision
for your children and spouse, and potentially protecting family businesses.
Trusts enable the donor to control who benefits (the beneficiaries) and under
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what circumstances - sometimes long after the donor’s death. Compare this
with making a direct gift (for example, to a child), which offers no control to
the donor once given.
When you set up a trust, it is a legal arrangement, and you will need to
appoint ‘trustees’ who are responsible for holding and managing the assets.
Trustees have a responsibility to manage the trust on behalf of and in the best
interest of the beneficiaries, in accordance with the trust terms. The terms
will be set out in a legal document called ‘the trust deed’.
There are now three main types of trust.
• Bare (Absolute) trusts – with a bare trust, you name the beneficiaries at
outset and these can’t be changed. The assets, both income and capital,
are immediately owned and can be taken by the beneficiary at age 18.
• Interest in possession trusts – with this type of trust, the beneficiaries
have a right to all the income from the trust, but not necessarily the
capital. Sometimes, a different beneficiary will get the capital – for
example: on the death of the income beneficiary. They’re often set up
under the terms of a Will to allow a spouse to benefit from the income
during their lifetime but with the capital being owned by their children.
The capital is distributed on the remaining parent’s death.
• Discretionary trusts - here, the trustees decide what happens to the
income and capital throughout the lifetime of the trust and how it is
paid out. There is usually a wide range of beneficiaries, but no specific
beneficiary has the right to income from the trust. Some discretionary
trusts will now have to pay an IHT charge when they are set up, at ten-
yearly intervals and even when assets are distributed.
THE EARLIER YOU PLAN, THE MORE YOU CAN ACHIEVE
We can work with you to ensure you make use of all the reliefs and
exemptions available. We can build a tailor-made succession plan based on
your individual circumstances to make sure the allowances work best for
you. We can give you the peace of mind of knowing that you have laid the
firmest foundations for your family’s future.
If you would find it helpful to have an initial conversation, then please
call our office or visit our website for further details. You can also email
me at: [email protected]