Price 80p
First & Foremost Asian Weekly in Europe
Vol 46 | Issue 25
Investing doesn’t have to be boring. (It’s just better that way.)
TM
DEAL WITH YOUR INHERITANCE TAX BEFORE ITS TOO LATE ADVERTORIAL
28th October to 4th November 2017
1
By Kishan Devani HBFS Wealth Management
UK inheritance tax (IHT) is charged on your estate when you die. Your estate is basically everything you own, including your main property, any other properties, cars, life assurance policies and other investments, as well as your personal effects such as jewelry. IHT is potentially charged at 40% on the value of everything you own above the nil-rate band threshold. The nil-rate band threshold is the value of your estate which is not chargeable to UK inheritance tax. The amount which is set by the government, is currently £325,000 and will be frozen until 2021. When you die your estate is not liable to tax on any assets up to this amount. However, anything above this amount is taxed at 40% In April this year, an additional allowance was introduced, known as the residence nil rate band. It allows your estate an additional allowance if you leave your home to your children or grandchildren. The residence nil-rate band allowance is £100,000 in the current tax year (2017/18) and will rise by an additional £25,000 per year until the tax year 2021 when the allowance will be £175,000. This allowance will be tapered
24/10/2017 15:40
if your estate is worth in excess of £2 million. Without an IHT plan in place, your beneficiaries could be faced with a large tax bill when you die. They may even have to sell some of your assets such as the family home, in order to pay for the IHT bill. Forward planning can help the people you want to benefit from your estate to actually benefit. One of your first steps should be to make a Will to make sure your wishes are carried out. If you are married you can use the spouse exemption which allows all assets to pass from one spouse/civil partner to the other when the first person dies, with no IHT to pay. However, I must caution you by pointing out that this exception may only delay and not solve the problem. For married couples and civil partners, it is possible to transfer any unused relief from a spouse or civil partner who died first, giving the second spouse or civil partner up to twice the current nil rate band. If you do nothing to mitigate IHT, your beneficiaries could be faced with 40% tax bill on all your assets over the nil-rate band and residence nilrate band. This could mean that HMRC could be the largest beneficiary of your estate. Something I’m sure you wouldn’t intentionally plan to do! Let’s look at an example: Mr & Mrs Patel are married with 4 children. They own a house worth £800,000 plus have other investments worth £1 Million. They have made no IHT plans apart from making mirror Wills, with each partner being the beneficiary from the death of the first spouse to die. Ignoring growth, let’s assume on the death of the second spouse the estate is worth £1.8 Million. The IHT calculation is
Let noble thoughts come to us from every side
the value of the Estate minus 2 Nil rate bands and twice the residence nilrate band. £1,800,000 – £850,000 (£650,000 + £200,000) = £950,000 which is liable to IHT. £950,000 x 40% = £380,000 IHT Bill. Mr & Mrs Patel’s 4 children would each receive £355,000 (£1.8 Million value of the estate - £380,000 (IHT charge) = £1,420,000/4) but as I just mentioned HMRC would receive £380,000 and would be the biggest individual beneficiary.
The main approach to IHT mitigation is to reduce the value of your estate over a number of years. The smaller the estate the less
how much should you spend each year! On a serious note you could gift money to your beneficiaries and as long as you live for 7 years after the gift has been made, this gift will be out of your estate for IHT purposes. This option should bring up other questions such as how much should I / could I give away, will I have access to the gift and will I have any control of how this gift is used while I am alive. The other alternative could be to put some money into Trust but will you be asking the same questions if you gifted the money? The answer in most cases lies in between. A combination of gifting and placing money into Trust usually works for most people. Let’s have a look at some of the gifting exemption options
IHT is paid by your estate when you die. There are many approaches to reducing your IHT liability such as spend your assets while you are alive. There are a few issues with this approach the major issue being you won’t know how long you’re going to live so
available. Small Gift Exemption: Gifts of up to £250 in total can be given to any number of people in one year are exempt from IHT. Annual Exemption: Individuals are entitled to give away £3,000 in total,
Reduce your IHT Bill
2
in any tax year free from IHT. This allowance can also be backdated by one tax year which means that if you did not use your annual exemption last tax year you can carry it forward to the current year and gift £6,000 this tax year. Normal Expenditure from Income: You can also make regular gifts (i.e. monthly, quarterly, or yearly) out of your income. If these gifts do not affect your standard of living, they could also be IHT exempt. Marriage or Civil Partnership Gifts Exemption: Gifts made can be made to a couple who are getting married or entering a civil partnership. A parent can give up to £5,000 a grandparent up to £2,500 and anyone one else can give up to £1,000 which is immediately IHT exempt. Other gifts are also exempt such as giving to charities and political parties. As you can see there are relatively small amounts which can be given away and which are IHT efficient. However, if your estate is larger you may want to consider setting up a Trust to allow you to pass on your assets to your beneficiaries in a very tax efficient way.
Trust A Trust is one way to move money out of your estate to reduce your IHT bill. It avoids potentially lengthy probate delays, so the peo-
24/10/2017 15:40
ple you want to benefit from your estate will benefit as quickly as possible and as tax efficiently as possible. A Trust allows you as the settlor to entrust your assets to a group of people known as the Trustees. The Trustees become the legal owners of these assets and manage these assets for the Trust beneficiaries. Trusts allow you to pass on your wealth when you die but some trusts can also allow you to receive regular withdrawals. Two of the most commonly used Trusts are:
Discounted Gift Trust (DGT) This type of trust allows you as the settlor to make a gift to a Trust. A significant percentage of the amount gifted is immediately outside of the estate. The amount of the discount will depend on your age and general state of health. You will also be able to take a regular income from the Trust as long as you live. After 7 years the entire Trust will be IHT free.
Loan Trust This Trust allows you to make a loan to Trustees. You will then have access to all or part of the loan at any time during your lifetime. Any growth from the loan is never part of your estate and will, therefore, pass to your beneficiaries free of Inheritance Tax. This Trust allows you retain total control of the capital safe in the knowledge that you are growing a gift for your beneficiaries that will be free of IHT. IHT, Gift and Trust planning can be considered a complex area, you should always seek professional financial advice before undertaking and committing to a plan. For more information please contact Kishan Devani on 020 8953 3444.
Past performance is not necessarily a guide to future performance.You may lose part or all of your money. A full risk assessment is carried out.