Thanks to rising property prices, families with even quite modest assets could find themselves subject to inheritance tax (IHT). However, prudent wealth management, can help mitigate against what is sometimes referred to as a voluntary tax.
The government is forecasted to raise £4.2 billion in inheritance tax during the 2015/16 tax year1 and it has been indicated by the Government that the existing inheritance tax threshold is set to remain at £325,000 until 2018. So while you may not welcome the idea of your estate being taxed again on the money it accumulated from previously taxed income, inheritance tax is not going to go away.
Inheritance tax is sometimes referred to as a voluntary tax because planning efficiently could mean that your estate doesn’t become liable.
Inheritance tax is payable at 40% on the value of the estate above £325,000 per person – or £650,000 per couple. However, following the Chancellor’s Summer Budget in July 2015, it was announced that from 2017 parents and grandparents will be able to leave property worth up to £850,000 to their children without them having to pay inheritance tax. This figure will rise to £1 million by 2020.
The current allowance of £325,000 remains unchanged but a new tax free band worth £175,000 per person on your main residence only will be added to the £325,000 making it £500,000 per person. The new tax free band will be set at £100,000 in 2017 before gradually rising to £175,000 in 2020.
There are very effective and perfectly legitimate ways to financially plan as a family to retain your wealth and help ensure that you don’t pay any unnecessary inheritance tax.
This kind of trust is often used for minor beneficiaries. The person who puts the assets in the trust (known as the settlor) dictates who will benefit and to what degree until any beneficiaries reach the age of 18 in England and Wales, or 16 in Scotland. At which point any beneficiaries can demand that the trustees release the funds to them.
Income from this type of trust goes to one beneficiary for their lifetime, but the capital goes to another or others when the initial beneficiary dies.The advantage of a Life Interest Trust is that it can provide income for a surviving spouse or partner with the capital preserved for the children. It is often employed in second marriages where there are children from a previous marriage. It is also an efficient way for income from assets to go to a beneficiary while retaining control of the capital.
With this kind of trust it is up to the trustees to use their discretion to determine who the beneficiaries are, when and to what extent benefits accrue to them.
A potential advantage of this trust is that it provides maximum flexibility.
For further information speak to your Private Banking and Advice Manager who can provide inheritance tax advice and a range of trust solutions.
1. House of Commons inheritance tax briefing paper, Antony Seely, July 2015
Any views expressed by Bank of Scotland Private Banking are our current in-house views as at September 2015 and should not be relied upon as fact and could be proved wrong. This article was prepared as at September 2015. The information and opinions may not be accurate after this date.
Tax treatment depends on individual circumstances and may be subject to change in the future.
For access to advice from a Private Banking and Advice Manager, you’ll need at least £250,000 in savings, investments and/or personal pensions and/or a sole annual income of at least £250,000.
Before we provide you with any services or products, we will explain and agree with you what advice can be given, the products and services this advice covers and any charges that will apply.
To arrange an appointment with one of our Private Banking and Advice Managers:
Lines are open Monday to Friday from 09:00 to 17:00 (Tuesday and Thursday until 19:00) and Saturday from 09:00 to 13:00, excluding bank holidays. Calls may be recorded or monitored. Call charges may vary.