Tax Planning
What Is Inheritance Tax (IHT)?
Inheritance tax (IHT) is a tax on the estate of someone who’s died. The estate can be a combination of:
- Property.
- Money/Savings.
- Investments.
- Other assets, worldwide.
- Anything you gift within 7 years leading up to your death.
This reduces how much value will ultimately pass to your children or other beneficiaries as HMRC would take the first slice of the wealth within your estate. Your beneficiaries are the people you want to leave your money and assets to when you die.
There’s normally no Inheritance Tax to pay if your estate is below £325,000. If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £1 million.
The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold of £325,000. When the value of your estate exceeds the limit, known as the ‘nil-rate band’, everything over the threshold is taxed at 40% (unless you’re leaving it to your surviving spouse). This applies to worldwide assets of ‘UK domiciled individuals’ (people whose permanent home is in the UK). It also applies to the UK assets of people who live abroad.
How Can I Reduce My Inheritance Tax Liability?
Gifting During Your Lifetime
Any gift you give seven or more years before your death is exempt from IHT. If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies, which means you are taxed on a sliding scale depending on how soon you die after gifting the asset.
If you give something away but still benefit from it (a ‘gift with reservation’), it will count towards the value of your estate.
Place some of your assets in a trust
A trust allows you to set money aside to support a beneficiary in a certain way or at a certain time. In some cases, placing assets in a trust means they do not form part of your estate when calculating IHT. It is possible to still receive an income from these assets. However, this isn’t always the case, and forming a trust can be complex.
Passing on your pension
Any money left in your pension when you die does not form part of your estate, meaning it isn’t taken into account when your Inheritance Tax bill is calculated.
Family Investment Company (FIC)
Individuals with large inheritance tax (IHT) estates might consider using a family investment company as part of an IHT planning strategy.
A Family Investment Company (FIC) is a bespoke vehicle which can be used as an alternative to a family trust. It is a private company whose shareholders and directors are (usually) the parents. A FIC enables parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning for their children or other beneficiaries.
By retaining control, it removes the risk for parents of forfeiting control whilst they are still alive, as they would still be in charge of decision making. All day-to-day control and investment decisions are vested in the directors. A FIC can therefore be used by individuals who want to transfer value to family members or other individuals but retain control over both the assets gifted and the access of the recipients.
Frequently the driver behind this is the protection of family assets in the long-term (e.g. from divorce) and balancing between ensuring children can enjoy the reward of their parents’ hard work, which provides them opportunities in life, whilst also ensuring that they’re not given too much too soon, potentially diminishing the drive of their children to make their own path.
One of the main advantages of an FIC is the benefits for inheritance tax. Over time the individual gives away shares in the company – presumably to family members.
Group Restructure / Holding Company
There are various reasons why having a holding company in a group structure is more beneficial than having a standalone company.
A holding company does not produce any goods or services by itself; instead, its main purpose is to own shares of other companies to form a corporate group. The real purpose of its existence is, therefore, to control another company.
Apart from this, it can also own properties such as real estate, patents, trademarks and other assets, ring-fenced from the trading business.
By owning assets, holding companies allow individuals to protect their personal assets and thus free them from the liability of debts, potential lawsuits, and any other possible risks.
Discretionary Trusts
A discretionary trust is the most flexible form of trust as the trustees have discretion over who should receive trust income or capital.
No beneficiary is automatically entitled to income from the trust property or to a transfer of the trust capital.
The trustees are given powers to pay or apply some or all of the trust income and capital for the benefit of the beneficiaries as they see fit.
Where the settlor wishes to make provision for his family but does not wish the beneficiaries to have control of the income or the capital, a discretionary trust is often used.
Please note this does not cover the taxation of a settlor interested trust and assumes that the settlor and spouse have been irrevocably excluded from benefitting from the trust.
Education Fee Planning
Private school fees are almost always settled out of income which has already suffered tax.
As an example, let ’s assume that the approximate annual cost of a child ’s school fees is £12k per annum. This would mean that dividend of c£17.5k per annum would be needed to fund the school fees, creating a significant amount of tax leakage.
In order to facilitate a structure whereby private school fees can be funded tax efficiently, a family member or friend (grandparent for example) would gift shares to a discretionary trust for the benefit of the children. In some instances shares may be purchased in the company at market value, if not already held.
How we can help
Given that estate planning isn’t just about passing on money when you die – but also about enjoying life now, and ensuring you have enough to live on when you retire, it’s important to start planning early.
We can show you how much money you will need, help you to pass on assets in the most effective way, and work with you to reduce or manage an inheritance tax bill.
The most tax-efficient way to pass on your business will vary significantly from one family to another. We can create an IHT-efficient fund to enable beneficiaries of an estate to meet the tax liability without disturbing family wealth.
We tailor our bespoke service to fit each unique clients’ needs. We gain a full understanding of your circumstances; before developing a structure that is most tax-efficient.
Our company has leading advisors to answer questions and we specialise in assisting clients to mitigate inheritance tax legally to enable you to organise your assets without straying into grey areas or taking unnecessary risks.
Where clients have existing advisers, we will work in partnership with them to work alongside our own team to ensure you gain access to the best specialist expertise.