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Tax Planning

Structuring your finances tax-efficiently can save you a significant amount of money now, and further down the line.
Tax planning isn’t just about passing on money when you die – it’s also about enjoying life now and ensuring you have enough to live on when you retire. We’ll work with you to identify what you want out of life and create a plan to get you there.

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.

Request a free assessment with our team to discuss your needs. We will answer all your questions without obligation.

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.

Get In Touch

Why do I need to think about IHT planning now?

In modern times, people in their 40s or even younger are becoming more aware that they’re going to have a future problem. The age of clients seeking professional advice about inheritance tax is dropping.

We are increasingly contacted by the children of wealthy people who think their parents should be doing more to plan for this — they don’t want to see 40% of their future inheritance disappear off to HMRC.

The rise in house prices (along with rising share prices) means that far more people will have estates which have a total value of over £325,000 and, as such, anything over £325,000 can be taxed at 40%.

While you may be pleased the value of your home is increasing, it may also mean you need to consider Inheritance Tax (IHT) planning now.

A Family Investment Company (‘FIC’) offers:

A means to pass on wealth down the generations

  • The ability to retain control whilst giving up beneficial ownership
  • Asset Protection
  • Protection against inheritance (IHT)
  • Tax savings and deferral

As well as passing down wealth without IHT charge, FICs can be tax-efficient vehicles that initially bring income within the corporation tax regime instead of the charge to personal taxes.

FICs are particularly efficient if profits are retained in the structure for reinvestment. There will be additional tax if profits are extracted from the company.

With the right planning, this structure will enable you:

  • To grow your property business in a commercial and tax efficient manner.
  • To have flexibility in terms of how you remunerate your family.
  • To undertake some form of inheritance tax (“IHT”) planning to mitigate the potential liabilities which would arise on your passing.
  • To pass future and current value in the FIC to the next generation, as efficiently as possible, whilst retaining a level of control.

The Benefits of an FIC:

A FIC provides a flexible structure through which to hold wealth for the benefit of the your family.

You would retain control over assets transferred into the FIC and have influence on how its assets are invested and when others can benefit. Each shareholder (typically children or other family members) can hold shares of a different class in order to give you flexibility on when to pay dividends or capital to them and in what proportions

Profits realised by the FIC are generally taxed at lower corporate rates (tax rate 19%, with full tax deduction for mortgage interest) than would otherwise be the case if the income/gains were generated by assets held by an individual (tax rate of 45% with restricted tax deduction for mortgage interest). Investments which are pooled together in a single structure may benefit commercially through lower management and investment fees than would otherwise arise if the investments were held separately by each family member. The main rate of corporation tax will increase from 19% to 25% from 1 April 2023. This rate will apply to companies with annual profits exceeding £250,000.

One of the main advantages of FICs are the inheritance tax (“IHT”) benefits. Not only is value passed to the next generation on the creation of snthe company but any increase in value of the investments is transferred immediately outside of your estate.

Whilst there is no ‘one size fits all’ to planning a FIC, there are considerable savings to be made where the structure is appropriate. FICs can be complex and it is vital to consider anti-avoidance provisions. Each family will have their own special circumstances and we treat each client on a case by case basis. Our specialists are experienced in this area and will design a bespoke structure which tailored around your plans; taking into account your future plans and requirements in order to protect your wealth for you and your family.

Although there have not been significant changes to the taxation of FICs, we may see new anti-avoidance rules created for FICs in the future. Therefore, it is strongly recommended that formal tax advice is sought prior to setting up a FIC.

The Benefits Of A Holding Company:

  • Tax free dividends or extraction of cash from the trading company to the holding company
  • Asset and cash protection through mitigating the risk from being made against the assets
  • Clients who wish to sell their business in the future can benefit from hiving out the trade element whilst keeping the cash and assets.
  • Investment opportunity – the cash that has been extracted to the holding company can be re-invested for further growth e.g. building a property portfolio or investing in new businesses.

Trusts And Inheritance Tax

Most trusts are now subject to IHT and a transfer to a trust in excess of the settlor’s available IHT nil rate band, currently £325,000, can result in an IHT charge at up to 25% if the settlor pays the tax (up to 20% if the trustees pay the tax). An IHT charge can also arise every ten years (the ‘principal charge’) beginning with the ten-year anniversary of the commencement of the settlement.

A charge may also arise if the trustees distribute capital (the ‘exit charge’) from the trust to a beneficiary between the ten-year anniversary dates. The IHT rate is 30% of the 20% lifetime rate, giving a maximum of 6% on the amount chargeable. The calculation of the rate and the value on which it is charged depends on the point in the trust life cycle at which the charge occurs.

Income Tax

  • The trustees will pay income tax at the ‘rate applicable to trusts’, which is currently at the additional rate for dividend and non- dividend income (from 6 April 2017 38.1% on dividend income and 45% on all other income). Trustees are not entitled to either a personal allowance or the new ‘dividend allowance’ available to individuals from April 2016.
  • The trustees can deduct the expenses incurred in the management of the trust when calculating the extent of this additional tax charge. Expenses are set first against dividend income then against savings income in priority to non-savings income.
  • Income distributions will be taxable in the hands of beneficiaries, and are considered to be received net of tax at the rate applicable to trusts (45% in 2020/21). The tax attributable to the distribution is then credited to the beneficiary and may be repayable depending on their circumstances.

Complications arise when tax is paid at the dividend rate (38.1%) and reclaimed at 45% so specialist advice should be sought on this point. Broadly the trustees must pay over the difference to HMRC.

Capital Gains Tax

Trustees are a chargeable person in their own right with a distinct legal personality and therefore pay capital gains tax in the same way as an individual would do.

Trust gains are charged at a flat rate of 28% on disposals of residential property and 20% on disposals of other chargeable assets. They will be able to claim reliefs, subject to meeting the appropriate conditions –including entrepreneurs’ relief (ER) (which would broadly require giving a beneficiary a life interest and the beneficiary satisfying the conditions for ER) which will reduce the CGT rate to 10% on qualifying gains.

The trustees are entitled to an annual exempt amount equal to half that of an individual. However, where a settlor has created more than one trust the annual exemption must be divided amongst the trusts subject to each trust having a minimum annual exempt amount of one-tenth of that of an individual.

Tax & Commercial Benefits Of Education Fee Planning:

  • The ability to fund school fees by utilising the personal allowance of minor children.
  • Flexibility to use trust structure for future IHT planning:

For example, in order to pay school fees of c£12k p.a, on the assumption that the client would fall in the higher rate tax payer bracket for dividend tax, they would need to receive dividends from a company of c£17.5k, representing a tax cost of c£5.5k p.a.

However, if the correct structure is implemented, it could be possible to utilize the children ’s annual personal allowances of £12,500 to minimize the tax costs to close to zero.

The tax saving in year 1 alone could be c.£6k and therefore close to c£18k after 3 years and the overall saving throughout the school life of a child could be in the region of £100,000.