Issue 131

TAX

Using trusts An important tool in IHT planning is the use of trusts. Trusts ensure assets are given to beneficiaries without incurring IHT. Various types of trust exist, enabling different approaches, depending on the circumstances of the individual and what they want to achieve. Trusts are often used where the person setting up the trust, the settlor, wants to ensure their wealth is passed as tax efficiently as possible to their beneficiaries and/or down the generations, but do not want to gift the money outright. Examples are where the trust is set up to leave assets to children or grandchildren but not until a certain age, or where the settlor wants to retain control of the capital in the trust in case it is needed for later life care, but may be happy for the beneficiaries to receive the growth on the capital. Other options to consider are whole of life policies and business relief. With this type of policy, you specify an amount to be paid out after you die. Your beneficiaries could then use this lump sum to pay any inheritance tax due to HMRC. While insurance policies form part of your estate, writing a policy in trust will put any payouts outside of your estate for IHT purposes. Business relief allows for particular investments to be held outside of your estate after two years. The advantages are that the money passes out of the estate after two years, the investor retains control and the process is simpler than setting up a trust. However, the investments are higher risk, so we would always recommend you speak to your Lowes adviser before considering business relief investments. As can be seen, while IHT can be a considerable burden on an estate, there are many ways to help legitimately reduce the amount of tax paid. Consulting a Lowes adviser can help simplify complex estate planning, and ensure you leave the legacy you intend and save your beneficiaries from paying IHT unnecessarily. Wills and expressions of wishes Lowes Chartered Financial Planner Helen Grieves adds: The corner stone to IHT planning is ensuring you have a Will in place. It can be surprising how many people put off making a Will thinking they will do so further down the line. But without a Will, there is no guarantee that our wealth will go where we want it to. Individuals who die without a Will, called dying intestate, could see their wealth apportioned by the state and The Crown could end up with your assets. A Will specifies where you want your assets to go, who gets what when you pass away, as well as who is to manage your estate (your executors), whose responsibility it is to carry out your wishes after your death. Similarly, expressions of wishes ensure certain assets, such as pensions, are passed on to those you want them to. Trustees of pension funds are not obliged to carry out your wishes but practically, most do. It is important to keep your expression of wishes documents up to date, especially after major life event such as marriages, births and divorces.

Defined contribution pensions, typically workplace and those you or your adviser have set up yourself, can be transferred in full or part to one or more beneficiaries on the death of the pension holder. If the pension holder dies before age 75, the beneficiaries can draw from the pension tax-free. After age 75, the beneficiaries pay income tax based on their marginal rate of tax. You can also pay into other people’s pensions, either £40,000 or 100% of their earnings, whichever is lower. Pension contributions to a child or young adult are a tax efficient gift that can help with their long-term financial security and tax relief is automatically added to the pension pot at the basic rate. This can also help reduce the value of your estate and can be preferred to outright gifts, as pensions cannot be accessed until age 55, currently. Making gifts to reduce your estate Gifting can also reduce an estate’s value but must be managed carefully and the order in which gifts are made can make a difference to the charges paid. Gifts that are IHT free are: • Those made between spouses/civil partners. • Annual gifting allowance of £3,000: Unused portions can be carried over one year. • Small gifts up to £250: Unlimited recipients, but not combined with annual allowance for the same person. • Wedding gifts: Up to £5,000 for a child, £2,500 for a grandchild, £1,000 for others. • Charitable donations. • Gifts from excess income, subject to strict conditions. Gifts made outside of these allowances become IHT-free if the giver survives seven years. If not, the gift is included in the estate. There is a sliding scale on the percentage of IHT paid from years three to seven. It pays to keep a record of any gifts made as executors of your estate will need to have this information if they are to correctly fill in HMRC’s forms.

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