The creation of wealth and the retention of wealth are goals many of us aspire to. But when our objectives change and it comes to providing for successive generations, it is the protection of accumulated wealth which becomes important. Protection in particular from the incidence of taxation, specifically Inheritance Tax (IHT).

However, wealth also needs to be protected from outside ‘events’ which may lead to your chosen beneficiaries being unable, unwilling or insufficiently responsible to look after funds themselves. For example, it needs to be protected for generations not yet born and people who may be at risk of divorce or bankruptcy.

To create wealth takes enterprise, vision and usually a mixture of hard work and good fortune. To retain and protect wealth requires sensible and simple Trust and Estate Planning.

There are three practical courses of action that may be taken to preserve and enhance your wealth for your heirs:

  • Make sure your financial affairs, in particular your Will, are arranged to ensure the efficient transfer of your assets on death, while saving the maximum amount of tax.
  • Transfer assets before your death through the prudent use of lifetime gifts.
  • Create a tax-efficient fund to enable the beneficiaries of your estate to meet the tax liability or to provide a legacy.

Planning your finances in advance should help you to ensure that when you die everything you own goes where you want it to. This could help you provide a sound financial future for your family.

Inheritance tax is basically the tax your ‘estate’ must pay on your assets when you die, before they can be passed on to your beneficiaries. It is a growing concern for more and more people and no longer applies just to the very wealthy.

Fortunately, it is a tax which can be planned for, and where certain mitigations can be deployed.

Broadly speaking your estate is everything that you own at the time of your death, less anything you owe. Assets taken into consideration include your home and its contents; life assurance policies (not in trust), bank and building society accounts, second properties or holiday homes abroad are also included. It is also sometimes payable on assets you may have given away during your lifetime, in the seven years prior to your death, such as property, possessions, money and investments.

Every estate has what is known as a Nil Rate Band threshhold (currently £325,000 for the tax year 2011/2012) which includes the value of any assets given away in the seven years prior to death and the value of the estate assets at the date of death. Any excess over this threshold is taxed at a flat rate of 40%.

Changes to Inheritance Tax Legislation

Since October 2007, any percentage of your Nil Rate Band which is unused on the first death is allowed to be transferred between partners and spouses. So, for example, if you leave everything to your spouse/partner, their estate will benefit from a 100% uplift in the survivor’s Nil Rate Band, at current rates, an increase to £650,000.

This transferability of the Nil Rate Band applies on the death of the surviving spouse or civil partner after 8 October 2007, regardless of when the first spouse/partner died.

Making a will is essential if you want to ensure your money goes where you intend it to after you die. It is also a good way to ensure that your beneficiaries do not pay more Inheritance Tax than they need to.

It is also generally good practice to equalise estates between spouses or civil partners; however you should take into consideration income and tax positions. For example, the husband may be a higher rate tax payer than his wife, therefore it may be appropriate to put income producing assets in her name to benefit from her income tax allowance.

The first stage of Inheritance Tax planning is to make sure you use all the available exemptions and reliefs. This may involve gifting assets to family and friends while you are still alive. Gifts can be exempt, potentially exempt or chargeable. Whilst making gifts is a good way of reducing the value of your estate, you must consider if you can afford to make the gifts and whether or not you wish to keep control over your assets.

The creation of a trust may be useful in IHT planning and can enable you to give away your assets now, but without physically handing them over to the chosen beneficiaries. Used in conjunction with a will, they can also help ensure that your assets are passed on in accordance with your wishes after you die.

Trusts are a complex area and require specialist advice. With our experienced trust and investment specialists and qualified support staff, we are ideally placed to offer you an efficient service.

Inheritance Tax Planning Package

We can help you plan well in advance to ensure that your money goes exactly where you intend it to go and that your beneficiaries’ inheritance is maximised.

All tax planning advice is based on the law as it stands. No one can guarantee that a change in the law will mean that today’s solution will remain the best solution for the future, particularly in relation to the law on trusts.
Inheritance Tax planning will involve the following:

Step 1: Full fact find meeting to establish the following:

  • Review of all client’s assets and liabilities
  • Ascertain client’s life objectives and their investment, retirement and estate planning objectives
  • Understand the salient points of the client’s will
  • Check if life policies are in trust and write into trust if required
  • Determine client’s attitude to investment risk using risk profiling techniques
  • Establish ideal asset allocation for client’s model portfolio
  • Review asset allocation of existing investments and compare to model portfolio

Step 2: Written report with initial recommendations

Step 3: Implementation

Follow up appointment with client to review report and recommendations and agree changes as necessary. If accepted by the client, implement recommendations and augment any existing plans as required.

Before any planning is undertaken there are some fundamental considerations that should be incorporated into your strategy:

  • Do not put tax savings as your sole motivation; your wealth exists for your benefit and enjoyment.
  • Make sure your arrangements are flexible as you may need them to change in the future.

With the complexities involved in trust and estate planning, if a simple solution can be found, it will usually be the best solution.