How Do You Want Your Estate To Be Spent?

Most people would rather choose who or what they leave their estate to after they've gone, rather than just hand over money to the tax man. The good news is, that as we explained in our last article, this is possible with regular and informed tax planning. Of course, different tax planning measures will suit different people and what works for you will depend on your particular circumstances but here are some key areas which you might wish to consider: 

Lifetime Trust planning

Gifting assets into trusts may incur an immediate IHT liability of 20% if the value of them, together with any other chargeable lifetime gifts in the preceding seven years, exceed the IHT Nil Rate Band (NRB), unless they qualify for business or agricultural property relief or are made from excess income.  They may also be liable to a CGT charge based on the market value at the time of the disposal. 

As above, gifts of cash or assets during your lifetime, if made without retaining a benefit, fall outside of your estate after seven years.  If you survive between three and seven years Taper Relief applies to reduce the rate of Inheritance tax. 

Tax planning tip:

• Consider trusts funded from excess income or assets qualifying for Business Property /Agricultural Property Relief.
• Consider gifts of cash or assets up to the value of the NRB to avoid the immediate charge to IHT.

Discretionary Will Trusts

Discretionary trusts in Wills can provide control, asset protection and long-term tax benefits. These may be useful, for instance, in blended families, or where outright inheritance is undesirable. Loan arrangements and future growth of trust-held assets can enhance tax efficiency.

They may incur IHT ten yearly charges and exit charges when assets leave the trust.

Tax planning tips:

• Use these trusts for flexibility in blended families or where outright inheritance is not the best option.
• Structure loan arrangements between the trust and surviving spouse to optimise IHT.

Life Interest Trusts

These can be used to ensure that the income, or benefit, of certain assets are directed to an appointed beneficiary for the duration of their lifetime, and upon their death the underlying assets are passed to a ‘remainderman’.

These ensure asset protection whilst providing for the life interest beneficiary.

Tax planning tip:

• Use these trusts to ensure that assets are ultimately directed to the person, or persons, of your choice, but that certain other people can benefit from them for their lifetime. 

Deeds of Variation

These can redirect an inheritance to another person or structure after death, allowing retrospective tax planning. However, they must be executed within two years of death.

Tax planning tip:

• Consider a deed of variation within two years of death to redirect inheritances more efficiently with minimal tax impact.

Planning for married vs. unmarried couples

Married couples and civil partners benefit from spouse IHT exemptions and transferable nil rate bands. Unmarried couples do not and should consider life insurance and other planning tools.

Tax planning tip:

• Unmarried couples should explore life insurance and trust planning options. 

Family investment companies and partnerships

Used as alternatives to trusts to retain control and reduce IHT exposure. Donors hold control shares; beneficiaries hold economic shares. These are helpful where trust tax charges are too restrictive.

Tax planning tip:

• Use different share classes to maintain control while transferring economic benefit to the next generation.

Charitable giving

Gifts to charity are IHT exempt. If at least 10% of the estate is left to charity, the IHT rate on the remainder falls from 40% to 36%.

Tax planning tip:

• Leave 10% or more of your estate to charity to reduce IHT rate.

Valuation implications for gifts

Gifting assets may trigger capital gains tax liabilities on unrealised gains. Some assets will qualify for Holdover Relief, which essentially defers the CGT liability until the transferee disposes of it. 

Unless deferred, CGT is payable at the time of the gift, based on market value versus acquisition cost.

Tax planning tip:

• Consider CGT consequences when gifting assets. Sell loss-making assets first to use losses.

Life assurance

Life assurance written in trust can fund IHT liabilities efficiently. The earlier it is arranged, the lower the cost. It also ensures the pay out is outside of the taxable estate.

Tax planning tip:

• Write policies in trust to avoid increasing your estate and ensure prompt access to funds.

Tax efficient Wills

Well-structured Wills may include:

• Gifts of business/agricultural assets to individuals or trusts to use reliefs.
• Use of discretionary trusts for flexibility and protection.
• Life interest trusts for the spouse to defer IHT and maintain asset control.

Tax planning tip:

• Allocate specific assets to beneficiaries and trusts to use available reliefs and nil rate bands effectively.

As always, these articles provide an overview of the various measures available and no action should be taken without seeking professional advice.  At Ritchie Phillips, we pride ourselves on providing clear, pragmatic advice to help businesses, individuals and families. If you’d like to discuss any of the above, please get in touch.