Inheritance Tax & Estate Planning: What to Consider

If your individual estate exceeds £325,000, you need to meet with an Inheritance Tax (IHT) expert as soon as possible. By seeking professional advice, you can protect your life’s earnings and minimise the tax consequences for your heirs, spouse and legal civil partner. Without proper inheritance tax structure, your heirs will be expected to pay a 40% inheritance tax within six months of your passing.

There are several tools, including trusts, property investments, gifts and charitable donations that can be used to significantly reduce tax exposure. Proper inheritance tax strategies take time to develop and implement. Consulting Expert Wealth Management now will allow you time to instil the necessary protections to maximise your estate’s value and minimise the tax exposure. How effective your inheritance tax strategy is can impact your heirs and their quality of life.

The Value of The Estate

The estate’s value is comprised of several calculations. Assets are real property, personal assets and holdings and investments, and trusts set up within seven years before the death of the principal. In the UK, the Inheritance Tax Rate is 40%. In cases where the gifts have been made in the seven years prior to death, these gifts might be considered part of the estate. For the most part, gifts of £3,000 are exempt and can be an excellent way to pass tax-free benefits along before the principal passes away.

This tax has the potential to severely penalise people who have worked hard and been fiscally responsible all their lives. The time to develop an Inheritance Tax Strategy is sooner rather than later. As tax law changes periodically and as financial events unfold, an individual’s inheritance tax strategy should be revisited annually.

Married Couples and Civil Partners

Important changes to Inheritance Tax Policy in 2007 served to benefit spouses and legal civil partners. Under the new provisions, married couples and legal civil union partners are not liable to the Inheritance Tax upon the first death to the couple. These couples can combine both their nil Inheritance Tax rates (£325,000 each) to create a joint nil tax rate of £650,000 upon the demise of both partners. When the first partner passes away, a personal representative or executor transfers the deceased spouse’s Inheritance Tax nil threshold to the second spouse.

It should be understood that in terms of the Inheritance Tax strategy, one size does not fit all. A good strategy can only be developed after a thorough review of the estate, income and potential. In addition to developing a strategy, the status of the estate must be periodically reviewed. In other words, maintaining the best possible Inheritance Tax strategy is an ongoing endeavour.

Options To Consider:

Estate holders have many options to consider. Below are some of the many possibilities that can help reduce tax exposure.

Outright Gift To Bare Trust – Some persons who definitely will not need access to certain amounts of money can give up the right to access by placing the money in a Bare Trust. After seven years, this trust would not be considered part of the estate. If the principal dies prior to seven years, parts of the trust would still be protected.

Loan Trusts – By establishing a loan trust, only the amount of original capital loan would be subject to the Inheritance Tax. Any interest and growth would not be subject to the Inheritance Tax and can serve the heirs as a tax-free benefit.

Discounted Gift and Income Trust – In this type trust, the principal purchases a life assurance bond, which is gifted to the trust. The principal receives a regular fixed income that is determined based upon an assessment of presumed life expectancy. A discount is offered so that the principal would see a reduced Inheritance Tax liability if the principal were to die in the first seven years following creation of the Discounted Gift and Income Trust.

Maturing Policies in Trust – This trust is a collection of investment bonds that mature on different dates. In this trust, the principal is permitted to gift money into a trust for selected beneficiaries even though the principal retains the right to periodic maturity proceeds. If the principal does not require maturity proceeds, the maturity dates can be extended. The entire investment is considered outside the estate after seven years. Investment growth is outside the Inheritance Tax as soon as the trust is created.

Other strategies include placing asset outside the estate after two years through Business Property Relief. Strategies to reduce exposure to the Inheritance Tax are not limited to the options above.

If you need assistance with your Estate Planning, get in touch with Expert Wealth Management today by calling 01993 772467 or contacting us online.

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