February 7th 2018

Passing on your wealth in a tax efficient way


Posted by:

Matthew Bromley

Bolton Accountants

Whether you have earned your wealth, inherited it or invested shrewdly, you will want to ensure that as little of it as possible ends up in the hands of HM Revenue & Customs. With careful planning and professional financial advice, it is possible to take preventative action to either reduce or mitigate an Inheritance Tax (IHT) bill – or eliminate it altogether.

Make a will
A vital element of effective estate preservation is to make a will. According to the Law Commission (England and Wales), nearly 60% of UK adults don’t have a will. This is mainly due to apathy but also a result of the fact that many people feel uncomfortable talking about issues surrounding death.

Making a will ensures an individual’s assets are distributed in accordance with their wishes. This is particularly important if the person has a spouse or registered civil partner. Even though there is no Inheritance Tax payable between the parties, there could be tax payable if one person dies without a will. Without a will in place, an estate falls under the laws of intestacy – and this means the estate may not be divided up in the way the deceased person wanted it to be.

Make allowable gifts
A person can gift cash or gifts worth up to £3,000 in total each tax year, and these will be exempt from Inheritance Tax when they die. They can carry forward any unused part of the £3,000 exemption to the following year, but they must use it then or it will be lost. Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500, and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as an individual wishes.

Give away assets
Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift, and provided the parents survive for seven years after making it, the money automatically moves outside of their estate for IHT calculations, irrespective of size.

Make use of trusts
Assets can be put in an appropriate trust, thereby no longer forming part of the estate after seven years. There are many types of trust available and these can be set up simply at little or no charge. They usually involve parents (settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors, the investment is paid out according to the settlors’ wishes. In most cases, this will be to children or grandchildren. The most widely used trust is a discretionary trust and this can be set up in a way that the settlors (parents) still have access to income or parts of the capital.

The income over expenditure rule
As well as putting lump sums into an appropriate trust, people can also make monthly contributions into certain savings or insurance policies and put them into an appropriate trust. The monthly contributions are potentially still within the settlor’s estate and subject to IHT, but if the person can prove that these payments are made out of excess income and are not compromising their standard of living, they are exempt from IHT.

Provide for the tax
If a person is not in a position to take avoiding action, an alternative approach is to make provision for paying IHT when it is due. The tax has to be paid within six months of death and interest is added after this time. Because probate must be granted before any money can be released from an estate, the executor may have to borrow money or use their own funds to pay the IHT bill.

This is where life assurance policies written in an appropriate trust come into their own. For a married couple, a life assurance policy is taken out on both the husband’s and wife’s life with the proceeds payable only on second death. The amount of cover should be equal to the expected Inheritance Tax liability. By putting the policy in an appropriate trust, it means it does not form part of the estate.
The proceeds can then be used to pay any IHT bill straightaway without the need for the executors to borrow or use their own funds.

Please contact Matthew Bromley, Chartered Financial Planner at Cowgill Holloway Wealth Management for further advice or to discuss your situation.

This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.