“In this world nothing can be said to be certain, except death and taxes.”
Benjamin Franklin, American statesman and Founding Father
In the complex world of financial planning nothing is certain. We therefore regard our clients’ financial plans as “living documents” to be reviewed and adapted as families grow and goals change.
However, the inescapable truth of life is that we must take our final journey at some stage and our families will be left to deal with the aftermath, which will include the financial side of life.
Bond actor Daniel Craig has recently thrown the media spotlight onto intergenerational wealth by revealing that he will not leave any of his film fortune to his two children.
At the opposite end of the spectrum, many Clarion clients have worked very hard to provide their families with wonderful, fulfilling lives and are keen that they should continue to enjoy the fruits of their lifetime’s labour after they are gone.
Fortunately, much can be done to reduce the burden of inheritance tax on your family and other beneficiaries.
Inheritance Tax (IHT) is set at a standard rate of 40% on anything above the standard nil rate band which currently stands at £325,000 per person.
Currently it is also possible for home-owning couples – either married or in a civil partnership – to pass on up to £1million without paying IHT, due to the additional £175,000 Residence Nil Rate Band.
HMRC statistics show estates worth between £2million and £3million paid an average of 20% inheritance tax in 2015-2016. By comparison those with £10m+ estates paid an average of just 10%, indicating the value of investing in expert advice.
Taking early action will ensure that more of your hard-earned money will end up with the people you want, rather than being swept into the Treasury’s coffers.
Here are just some of the ways we help our clients to navigate the complex world of inheritance tax and give them the peace of mind that their bereaved family will have a guiding hand at the worst moment in their lives:
Utilise your gift allowances – consider giving away some of your estate, as certain gifts are excluded from your estate for IHT purposes:
Consider gifts out of surplus income – one of the simplest methods of reducing the value of your estate for IHT purposes (other than spending it!) is to give away surplus income not required to meet day to day expenses.
This exemption allows you to give away money deemed surplus income, providing the gift does not reduce your standard of living, is not from capital, and is regular.
Consider gifting assets – gifting assets, such as cash or property, can also be an effective way of reducing the future value of your estate for IHT purposes. However, it is important to ensure that, having gifted the asset, you no longer benefit from it. You must also survive for seven years, and gifts of this nature are known as ‘potentially exempt transfer’. If you die within seven years, the recipient of the gift may be liable for IHT on its value.
Assets can be directly gifted or via certain trusts, with the latter allowing for a greater degree of control over the asset, with trustees being able to stipulate conditions as to the timing and use of the gifted asset.
Insure your IHT liability – another simple method of protecting the value of your estate for your beneficiaries is to insure your potential IHT liability. If you have surplus income, you could take out a ‘whole of life’ assurance policy that would pay out a fixed amount to cover the potential IHT liability on death.
The policy should be written into trust, to ensure the eventual benefit does not further increase the estate.
Insuring the liability often provides a flexible solution, enabling clients to retain control over their assets, whilst allowing their financial position to evolve.
Consider specialist investments – certain assets qualify for a tax relief known as Business Relief (BR) and it is possible to invest via these assets. With a BR qualifying portfolio*, once assets are held for two years, they can then achieve exemption from IHT, providing they are still held at the time of death.
Many of these investments are unlisted and certain Alternative Investment Market (AIM) listed stocks also qualify. This is a high-risk investment solution and will not be right for all investors. However, it does not involve giving assets away, so you can retain access to your capital, and the IHT exemption applies after two years – not seven.
Clarion Wealth Planning are Chartered Financial Planners, specialising in true lifelong financial planning and investment management.
To address Inheritance Tax and intergenerational wealth matters, please do call to arrange an appointment with one of our expert financial planners, +44 (0)1625 466 360 or email us an enquiry at email@example.com
*This type of investment should be regarded as high risk as it is exclusively focused on equities. The portfolios are wholly invested in small capitalisation stocks. These companies are therefore more volatile and whilst they offer great potential, growth is not guaranteed. It is important to note that this should be seen as a long-term investment.
The current inheritance tax rules and tax treatment of BR qualifying investments may change in the future. We strongly recommend that clients discuss their financial arrangements with their tax adviser before investing, as the value of any tax reliefs available is subject to individual circumstances.
If you’d like more information about this article, or any other aspect of our true lifelong financial planning, we’d be happy to hear from you. Please call +44 (0)1625 466 360 or email firstname.lastname@example.org.