December 18, 2023
The first entry in our Guide to Inheritance Tax (IHT), covered the broader scope and rules of IHT in the UK. It is worth remembering that the government has frozen the threshold until 2028, while the value of your estate could still grow. The current threshold has been in place since 2020. After 8 years of compound growth an estate could be worth much more by 2028, potentially leaving a nasty surprise for your loved ones. With that understanding now in place, it’s time to look at the available options for tax-relief, exemptions or mitigation.
From lifetime gifting, to pensions and specialist reliefs, there are plenty of measures you can take. With good preparation, more of your wealth can end up where it should: with the people you love.
First of all, some good news: certain asset types have associated reliefs that can make a real difference. These primarily to prevent the need to sell the family business in order to meet tax liabilities. Let’s take a look at the different reliefs available.
Business Relief offers 100% or 50% exemptions, depending on circumstances and the nature of your relationship to the business. An advisor can explain the range of reliefs in greater detail.
Agricultural and Woodland Relief applies to estates devoted to specific purposes. If the donor has occupied the property for agricultural pursuits for at least two years prior to transfer – or if they have owned it for seven years under the stewardship of others – they may be entitled to Agricultural relief between 50% and 100%.
Two additional types of relief are Taper and Quick Succession. These are more complex mitigations, relating to the levels of non-exempt transfers made in the years prior to the donor’s death. Your financial planner can explore these types of relief in more detail.
Legislation is always subject to change, so we recommend making use of any applicable reliefs whilst they are still available.
Passing funds to those that need your help, when they need it. You can utilise your annual gifting allowance of £3,000. If you didn’t use last years allowance, you can use this too. Gifts in excess of the annual gifting allowance will take seven years to fall out of the donor’s estate. It is important to have a plan and keep records of gifts.
Making a gift out of regular income does not have the same rules applying as gifts of capital and will be outside of your estate immediately, so helping wish school fees or making contributions to a child or grandchild’s JISA regularly maybe something to consider.
There are other things to consider when it comes to transferring value during your lifetime. Capital Gains Tax (CGT) and the introduction of the Pre-Owned Assets Tax (POAT) in 2005, have implications for IHT, so it is important to take advice.
Making the most of pension allowances and associated tax relief are good practice to plan for retirement. But pensions are also helpful as part of an overall financial plan when considering IHT. The funds that are held in a pension do not form part of your estate and as such would not be subject to IHT on death. In addition to your own pension, you could also consider making contributions to family members pensions utilising the gifting allowances detailed above. You can even contribute to a pension for a minor and subject to the maximum of £3,600 per annum for a non-earner, this would also attract income tax relief.
A lifetime gift can be a great way to offset IHT, whilst also passing on your wealth to the next generation at a time when they need it most, but many people are worried about losing control.
Trusts are an excellent alternative – and a fundamental part of estate planning. They are a way to protect wealth that could otherwise pass out of the family during divorce or bankruptcy; they offer Capital Gains, Income Tax and IHT mitigations, and they allow you to retain some control over the money until you feel your beneficiary is ready.
There are things to consider when it comes to transferring value into a trust, however. Different types of trust offer different relationships with IHT and have different structures and rules and therefore benefits and impacts. Here are some ways that trusts can be used:
A you can see, there are a range of different possibilities as ever, we recommend expert advice in choosing the best option as part of a tailored plan for your circumstances.
IHT is a complex puzzle and expert advice is indispensable. But, before you even begin planning your approach with Wells and Co. we have some general advice to consider.
Next month we’ll be back with the third and final entry in our Understanding IHT series… looking at the real-world impact of IHT, along with case studies to illustrate the difference good planning can make.
Don’t wait for that, though. Get in touch now, for a conversation about how Wells & Co. can help you pass on your wealth to the people you care about.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
Trusts are not regulated by the Financial Conduct Authority
