A fresher look at estate planning

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Its easy to plan for passing on your wealth less 40% inheritance tax after your death so long as the beneficiaries under your Will don’t start falling out or new potential beneficiaries don’t come out of the wood work. As a tax adviser, I have always assumed that someone would want to reduce their liability even in the event of death. However, I am wrong and somewhat bemused by the number of dying people who really don’t feel a sense of duty to maximise that passed on for future generations. It must be because they feel the Government is simply better at spending their money……

If you are one of those with a desire to pass on wealth in a controlled manner to future generations, maybe alleviating the burden of schools or university fees, there are several ways you can mitigate IHT during your lifetime. Below we set out a few ideas although everyone’s circumstances should be considered carefully, and tailored advice provided.

Idea One: If you have more income than you require to live from, you may be able to make a gift out of ordinary income. Annual gifts out of income, which does not reduce your capital, may be entirely outside the scope of IHT. However, you may not want to make a direct gift of income. You may instead make such gifts to an estate planning structure such as a trust or company. The structure may then invest, and the pot grow over time. This type of planning is often done to facilitate passing of wealth to younger generations or pay for their school fees.

Idea Two: It may be worth holding IHT favoured investments. There are a number of diversified investments funds that would qualify for business property relief (“BPR”). If those funds don’t appeal, furnished holiday lettings qualify for BPR and may be an attractive alternative. There is also the potential of creating your own qualifying business – we recently explored an interesting idea with a client which would not overly occupy them. Once assets have qualified for BPR after two years of ownership, you could transfer them to a trust, the trust could then realise them should it be desired. The trust assets would be outside your estate for IHT purposes.

Idea Three: If you hold investments or property investments, there may be merit to incorporating or undertaking new ones in a company. This is simply because it is often easier to give away shares without losing all control and influence. For example, shareholders agreements could be used to organise the decision-making process. There is also the potential that a trust could be given or acquire shares in the company.

Idea Four: If you do own your own company, you could consider giving away any future growth in capital value by creating a class of shares – ‘capital growth shares’. This planning may be less useful for shares qualifying for business property relief and may be more suitable for investment companies. The shares could also be placed into a trust, whilst low value, if that were desired.

Idea Five: The problem with getting large value assets into trust is the potential t is a chargeable lifetime transfer for IHT at 20% above the nil rate band. An alternative may be a family partnership which doesn’t attract IHT on the transfer of assets in.

Idea Six: The family home is always a difficult asset to plan with given you may wish to continue to occupy rent free and you might want to sell and downsize in the future. For some, planning is available. There are a few ideas that could help, for example, you could carve out a lease leaving two assets – a lease and a freehold reversion. You could retain the leasehold with a fixed low rental and then sell the freehold to the intended beneficiaries at market value. There are a number of potential complications and detailed analysis for you and the beneficiaries would assist identifying whether planning is a good idea.

Although there are a lot of things you can do during your lifetime to reduce IHT, most opt to simply plan through their Wills. This is an option although one with less efficiency. It would be far better to know what your lifetime planning options are and fit your Will in around the ones you choose to put in place.

By Anton Lane

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