Ian Thomas, Pilot Fiancial Planning
Death & Taxes
Benjamin Franklin said famously that ‘in this world nothing can be said to be certain, except death and taxes’.
Neither subject – death or tax - is particularly cheery, to say the least, and in combination they are downright miserable! It’s probably for this reason that Inheritance Tax (IHT) is a conversation which often remains taboo within families until it’s too late. Last year alone nearly £3bn was paid in IHT, yet much of it could probably have been avoided.
The basic IHT calculation is pretty straightforward. On death, the value of a person’s total net assets is calculated. Each individual is currently entitled to pass on £325,000 with no liability to tax, but above this level, the entire estate is subject to tax at 40%. So, for example, on an estate valued at £1m, the beneficiaries would be required to pay £270,000 in tax (£1m - £325,000 x 40%). Transfers between spouses, or civil partners, are however entirely exempt and the introduction, in 2007, of a transferable nil rate band effectively means that the ‘tax free’ estate has effectively doubled in size to £650,000 for most couples.
There are a number of IHT mitigation strategies, including: gifting, insurance and the use of exemptions & reliefs. The detail is often complex, so it always pays to take professional advice, but some of the techniques in common use are summarised below.
Perhaps the simplest strategy is to assess whether you can afford to give away any assets. There is an annual allowance and various other smaller gifts can also be made with no strings attached. A further exemption relates to any gifts made out of ‘surplus income’. For example, if your annual income is £50,000, but you can demonstrate that your normal expenditure is £30,000, then subject to meeting certain criteria, the balance could be gifted free of any tax each year. Any other gifts are classified as ‘potentially exempt transfers’ (PETs) and only fall outside your estate entirely after seven years. One or more of these exemptions or reliefs can also be utilised to fund a regular premium life assurance policy, the proceeds of which could be used to pay any remaining IHT liability.
If making outright gifts is not suitable for whatever reason (maybe you’re just not that sure about Johnny’s new girlfriend!) then more control over the use of any assets can sometimes be achieved through a gift into a discretionary trust. Other trust variations, such as loan trusts or discounted gift trusts, also allow you to retain some access to your funds whilst at the same time reducing the value of your estate. Again, at least a seven year period is required for any of these strategies to be effective.
Business & agricultural property also benefits from certain exemptions. Although originally intended to ensure that family businesses were not broken up on death, there are now a number of funds which facilitate a diversified investment into numerous AIM-listed or privately-held smaller companies. These funds utilise the business property relief rules and as a result, it is possible to retain full control and access to your assets, as well as ensuring that no IHT is payable by your estate after just two years. The catch is of course that these investments are typically relatively risky (whatever the marketing brochure may say) and so caution is required.
Often the best strategy will combine more than one approach to the problem. A good financial planner can not only help you to clarify the best solution for your own personal circumstances & objectives, but also provide an independent perspective in a potentially difficult inter-generational discussion.
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First Published December 2012 By The Dart