Tax Planning

When is one of the best time to consider inheritance tax planning?

Let’s face it, nobody likes to think about their own downfall. Likewise, many people cannot bear the thought that a large part of their wealth will be swallowed up by the tax officer when the time comes.

But while many people understand the importance of inheritance tax planning, few fully understand the rules or know when to start planning.

So what are the basic principles that you need to understand?

It is a tax that most individuals will not pay

The first point may sound strange, but most people won’t pay IHT in their lifetime. Rather, it is their estate that is burdened when they die. There are a few cases where lifelong IHT applies, but this is generally the exception rather than the rule and is most common when large gifts are paid to a trust.

It’s a completely voluntary tax

The second point is a little ironic, but the fact is that IHT can be avoided with proper planning. Obviously, this is not the right course of action for everyone, especially those with valuable single-family homes where IHT planning can be difficult.

The seven year rule

Quite simply, any gifts made, either direct or in trust, while reducing the value of the donor’s estate, fall into the IHT equation if that individual dies within seven years of the gift.

After three years, the tax that may be due on gifts will decrease each year on a sliding scale called “taper relief”. In this sense, the zero rate band (NRB) becomes important.

The zero rate band

The NRA is essentially the tax-free allowance on your estate, which is currently £ 325,000, ignoring any possible addition if you are giving away your main home. For example, if a person gives their daughter a gift of £ 300,000 and then dies within seven years, the value of the gift would undermine the available NRA, leaving only £ 25,000 to be offset against the estate. Therefore, the full value of the gifts given within the NRA will affect IHT’s potential liability for the entire seven year period.

The NRA also plays an important role when individuals want to take steps to mitigate IHT but are concerned about the responsibility of beneficiaries. This is where the use of trusts can become important.

Gifts and Trusts

Gifts to the most flexible trusts are subject to restrictions that do not apply to direct gifts to individuals. Gifts in excess of the NRA (£ 325,000 per person) are subject to a lifetime IHT fee.
After seven years, the original gift is released and falls out of the IHT equation, restoring the available NRA. The process can then start again with an additional £ 325,000 that can be put into a trust fund, with the donor in full control of the assets and how they are distributed to the beneficiaries.

This means that when it comes to IHT planning, the earlier is always better, especially for high net worth individuals who are able to trust large sums of money over time over seven years.

You have options

It’s important to note that planning around IHT is not an all-or-nothing scenario when it comes to keeping it all or giving it all away. There are several solutions that steps can be taken to reduce IHT while still giving you access to income and capital.

For example, instead of using a trust fund to give away funds, assets can be lent. In this case, the short-term IHT benefits are less widespread, while the IHT liability is reduced in the longer term. In this scenario, you retain access to capital and income while you build a beneficiary fund that sits outside your estate.

However, if you don’t prepare early, e.g. For example, if you leave this much later in life, or if you have health problems, your options become much more limited, if not exhausted.

Certain trusts may offer immediate IHT benefits, while certain investment structures may offer IHT relief after a two-year holding period. In this scenario, it is important that the investment itself is a suitable solution for you and not driven solely by the tax benefits of IHT mitigation.

Of course, inheritance is not a favorite topic, but the right balance of planning options can help prevent the bereaved from facing a significant – but avoidable – tax burden.

The information contained in this document does not constitute investment or tax advice. Tax regulations are subject to change and taxation varies according to individual circumstances.

See also: IHT-safe your investment portfolio

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