Approaches to inheritance tax

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.

Managing your estate

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.

Wealth management

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.

  1. Write a will. Without a will you may be less likely to benefit from any potential inheritance tax exemptions. Your estate may be less likely to be administered in the most tax-efficient manner and you may find that relatives other than your spouse, partner or those who you would want to inherit, could be entitled to a portion of your estate. Bank of Scotland Private Banking provides a will writing service through Brodies LLP in Scotland.
  2. Gifting. In order to reduce the potential value of your estate it might be prudent to gift some of your wealth to your intended heirs during your lifetime. Any gift made to an individual or trust, at least seven years prior to death is exempt from inheritance tax. Theoretically you can pass on as much as you wish in what are known as Potentially Exempt Transfers (PETs), but the regulations around these and any gifts from which you continue to benefit are complex.
  3. Philanthropy. Leaving at least 10% of the total value of your estate to charity could reduce the inheritance tax liability on the taxable portion of your estate from 40% to 36%.
  4. Trusts. As a wealth management solution, trusts are often employed to provide for children and partners and sometimes to enable efficient family business succession. Any trust set up is a legal arrangement with the trustees controlling the assets in line with the terms of the trust deed.

Three types of trust to consider:

Bare (Absolute) Trusts

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.

Life Interest Trusts

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.

Discretionary (Flexible) Trusts

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.


SOURCES:
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.

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