Table of Contents
Introduction
Inheritance tax impacts the transfer of wealth from one generation to another. If you have an estate valued at £2M, you should take professional advice.
The wealthy often employ sophisticated strategies to find the best way to pass on an inheritance. In this article, we explore seven steps that affluent individuals take to avoid or reduce inheritance tax liabilities.
We welcome enquiries from estates that are either high value or complex. If you are unsure of your current estate planning, we are happy to provide a second opinion.
Arrange for a Modern Will with Associated Trusts
In estate planning, affluent individuals often use a modern will and trusts. This strategy manages assets well and cuts inheritance tax. It ensures smooth wealth distribution. It also adds flexibility, protection, and tax benefits.
Understanding Modern Wills and Trusts:
A modern will outlines asset distribution wishes at death. Trusts, set up alongside, manage certain assets. This gives better control and protection during one’s life and after.
Trusts vary, including:
- Discretionary trusts: Trustees decide how to distribute assets to beneficiaries, considering their needs.
- Life interest trusts: A beneficiary uses the assets for life. Then, others inherit them.
- Protective trusts: These protect assets from creditors or divorce, preserving them for beneficiaries.
Using Trusts for Tax Benefits:
Asset protection: Trusts safeguard assets from risks like family disputes, ensuring they reach the right hands.
Tax efficiency: Trusts can reduce inheritance tax by using exemptions and reliefs. This strategy improves estate value for beneficiaries.
Control and flexibility: Trusts let individuals control asset distribution beyond their lifetime. Trustees follow the settlor’s wishes, adjusting to changes and protecting beneficiary interests.
Avoiding probate: Trust assets skip probate, speeding up beneficiary distribution. This reduces delays and costs.
Considerations for Modern Wills and Trusts:
- Seek professional advice: Estate planning is complex. Legal and financial experts ensure trusts are set up and run correctly.
- Personalise your plan: Your family’s unique needs and goals should shape your estate planning.
- Update regularly: Review and adjust your will and trusts as your situation, tax laws, or goals change.
In summary, effective use of wills and trusts can protect assets from inheritance tax. It ensures financial security for generations.
Arrange for High-Quality Lasting Powers of Attorney
Lasting Powers of Attorney (LPA) are crucial legal documents that grant trusted individuals the authority to make decisions on behalf of the individual (the donor) should they become unable to do so themselves due to illness, injury, or mental incapacity. Arranging high‑quality LPAs is a fundamental aspect of comprehensive estate planning, providing individuals with the peace of mind that their financial and healthcare affairs will be managed according to their wishes, even in challenging circumstances.
Understanding Lasting Powers of Attorney:
There are two main types of LPAs:
- Property and Financial Affairs LPA: This document grants attorneys the authority to make decisions concerning the donor’s financial affairs, including managing bank accounts, paying bills, buying, or selling property, and making investments.
- Health and Welfare LPA: This document authorizes attorneys to make decisions related to the donor’s health and welfare, such as medical treatment, care arrangements, and daily living decisions, in case the donor lacks the mental capacity to make such decisions themselves.
Benefits of High-Quality Lasting Powers of Attorney:
- Control over financial affairs: By appointing trusted attorneys in a Property and Financial Affairs LPA, individuals can ensure that their financial affairs are managed effectively, even if they are unable to do so themselves due to illness or incapacity. This can help prevent financial mismanagement or exploitation and ensure the continuity of financial planning strategies.
- Peace of mind: Knowing that there are mechanisms in place to manage healthcare decisions and personal welfare matters through a Health and Welfare LPA provides individuals with peace of mind, knowing that their wishes regarding medical treatment and care preferences will be respected and followed.
- Avoiding court intervention: Without LPAs in place, if an individual loses mental capacity, their affairs may need to be managed by the court through the process of deputyship, which can be costly, time-consuming, and intrusive. LPAs allow individuals to choose their attorneys and avoid court intervention, maintaining privacy and autonomy.
- Family protection: LPAs can help protect families from the emotional and financial strain of having to make difficult decisions on behalf of a loved one without clear legal authority. By appointing attorneys and providing guidance on the donor’s preferences and values, LPAs can help alleviate family conflicts and ensure decisions are made in the donor’s best interests.
Considerations When Arranging Lasting Powers of Attorney:
- Choosing trusted attorneys: Selecting attorneys who are reliable, competent, and trustworthy is crucial. Individuals should consider appointing family members, friends, or professionals who understand their wishes and will act in their best interests.
- Clear communication: It’s essential to communicate openly with appointed attorneys about one’s wishes, preferences, and values regarding financial and healthcare matters. This helps ensure that attorneys understand the donor’s intentions and can make informed decisions on their behalf.
- Regular review and updating: Lasting Powers of Attorney should be reviewed periodically to reflect any changes in personal circumstances, relationships, or legal requirements. This ensures that the documents remain effective and aligned with the donor’s wishes over time.
In conclusion, arranging high-quality Lasting Powers of Attorney is a critical aspect of estate planning, providing individuals with control, protection, and peace of mind over their financial and healthcare affairs. By proactively appointing trusted attorneys and providing clear guidance, individuals can ensure that their wishes are respected, and their interests are safeguarded, even in challenging circumstances.
Make Exempt Gifts
Inheritance tax planning often involves making use of various exemptions and allowances provided by tax laws to minimize the tax burden on one’s estate. One such strategy is to make exempt gifts during one’s lifetime, effectively transferring assets to beneficiaries without incurring inheritance tax liabilities. This proactive approach not only allows individuals to pass on wealth to loved ones but also reduces the overall value of their estate subject to taxation.
Understanding Exempt Gifts:
Exempt gifts are transfers of assets that are not subject to inheritance tax or are taxed at reduced rates, depending on the specific circumstances and applicable exemptions. These gifts can take several forms, including:
- Annual exemption: Individuals can gift up to a certain amount each tax year without incurring inheritance tax. This allowance is known as the annual exemption, and it is currently set at a specified threshold per individual.
- Small gifts exemption: In addition to the annual exemption, individuals can make small gifts of up to a certain amount to any number of recipients each tax year without triggering inheritance tax liabilities.
- Gifts in consideration of marriage or civil partnership: Gifts made in consideration of marriage or civil partnership are exempt from inheritance tax up to a certain threshold, depending on the relationship to the donor.
- Charitable gifts: Donations to qualifying charities are exempt from inheritance tax, allowing individuals to support charitable causes while reducing the taxable value of their estate.
Benefits of Making Exempt Gifts in Inheritance Tax Planning:
- Tax efficiency: By utilizing exempt gift allowances, individuals can reduce the taxable value of their estate, thereby minimizing potential inheritance tax liabilities. This strategic approach enables individuals to pass on wealth to beneficiaries while maximizing tax efficiency.
- Wealth transfer: Making exempt gifts during one’s lifetime allows individuals to transfer assets to loved ones and beneficiaries, providing financial support and security without the delay and administrative burden associated with probate.
- Family assistance: Exempt gifts can be used to provide financial assistance to family members for various purposes, such as education, housing, or starting a business, helping to support their aspirations and goals.
- Estate planning control: By making exempt gifts strategically, individuals retain control over the distribution of their assets and can tailor their estate planning strategies to achieve specific objectives and priorities.
Considerations When Making Exempt Gifts:
- Documentation and record-keeping: It is essential to maintain accurate records of all exempt gifts made, including dates, amounts, and recipients, to ensure that your records can answer questions from HMRC.
- Lifetime giving strategies: Individuals should carefully consider their overall financial circumstances and objectives when making exempt gifts to ensure they do not inadvertently deplete their own financial resources or jeopardize their long-term financial security.
- Professional advice: Seeking guidance from tax advisers or financial planners is advisable when implementing exempt gift strategies to ensure compliance with tax laws and optimize the tax efficiency of estate planning arrangements.
In conclusion, making exempt gifts represents a valuable strategy in inheritance tax planning, allowing individuals to transfer wealth to loved ones, reduce inheritance tax liabilities, and support charitable causes. By leveraging the various exemptions and allowances provided by tax laws, individuals can optimize their estate planning strategies and ensure the efficient transfer of assets to future generations.
Consider the Use of Life Insurance Written Under Trust
Life insurance written under trust is a strategic tool employed by the wealthy to mitigate inheritance tax liabilities and ensure the smooth transfer of wealth to beneficiaries. By placing life insurance policies within trust structures, individuals can maximize the benefits of life insurance while minimizing potential tax implications.
How Life Insurance Written Under Trust Works:
When a life insurance policy is written under trust, the policyholder (the insured individual) transfers ownership of the policy to a trust, with designated trustees responsible for managing the policy and distributing proceeds according to the terms outlined in the trust deed. The beneficiaries named in the trust deed are entitled to receive the proceeds of the policy upon the death of the insured.
Benefits of Life Insurance Under Trust in Inheritance Tax Planning:
- Exemption from inheritance tax: Life insurance policies written under trust are typically exempt from inheritance tax, meaning the proceeds of the policy are not considered part of the insured individual’s estate for tax purposes. This can significantly reduce the overall inheritance tax liability on the estate, ensuring that beneficiaries receive a more substantial inheritance.
- Liquidity for tax payment: Inheritance tax is often payable shortly after the death of the individual, and the estate may lack sufficient liquid assets to cover the tax liability. Life insurance proceeds can provide the necessary liquidity to settle the tax bill without the need to sell other assets, such as property or investments, which could disrupt the intended distribution of wealth.
- Protection of family business: For individuals with significant business interests, life insurance under trust can be instrumental in protecting the continuity of the business. The tax-free proceeds from the policy can be used to buy out the deceased owner’s share of the business, ensuring a smooth transition of ownership without the burden of inheritance tax.
- Flexibility in distribution: By establishing a trust, individuals can specify how the proceeds of the life insurance policy should be distributed among beneficiaries. This allows for greater control over the inheritance process, ensuring that assets are distributed according to the individual’s wishes and financial planning objectives.
Considerations:
- Trust administration: Establishing and managing a trust requires careful attention to administrative duties and legal requirements. Individuals should work with experienced professionals, such as solicitors or financial advisers, to ensure proper trust setup and ongoing management.
- Premium payments: The payment of premiums for the life insurance policy must be maintained to keep the policy in force. Individuals should consider the affordability of premiums over the long term and incorporate them into their financial planning strategy.
- Review and update: It’s essential to regularly review and update the terms of the trust and the designated beneficiaries to reflect changes in personal circumstances, tax laws, or financial objectives.
In conclusion, life insurance written under trust is a powerful tool in inheritance tax planning, offering tax efficiency, liquidity, and flexibility in wealth transfer. By leveraging this strategy, individuals can protect their assets, minimize tax liabilities, and ensure the financial well-being of their loved ones upon their passing. However, careful consideration and professional guidance are essential to maximize the benefits and navigate the complexities of trust-based estate planning.
Consider Creating Debt, Using a Mortgage or Equity Release
Creating debt either by means of a conventional mortgage or equity release can be a useful strategy, if carefully thought through.
There is no point in creating debt if you do not intend to do anything with the money you have raised.*
Equity release is a financial strategy that allows property owners, typically retirees, to access the value tied up in their homes without the need to sell them. It offers a way to convert a portion of the property’s equity into cash, either in a lump sum or through regular payments, while retaining the right to live in the property.
How Equity Release Works:
Equity release schemes come in various forms, including lifetime mortgages and home reversion plans:
- Lifetime mortgages: This is the most common form of equity release. It involves borrowing against the value of the home, with interest accruing on the loan. The loan, plus interest, is typically repaid from the sale of the property when the homeowner passes away or moves into long-term care.
- Home reversion plans: In this arrangement, the homeowner sells part or all of the property to a provider in exchange for a lump sum or regular payments. The homeowner retains the right to live in the property rent-free for the rest of their life or until they move into long-term care. Upon death or moving out, the property is sold, and the provider receives their share of the proceeds.
Benefits of Equity Release in Inheritance Tax Planning:
- Access to liquidity: Equity release provides access to cash without the need to sell the property, which can be particularly beneficial for those who have a significant portion of their wealth tied up in real estate.
- Reduction of estate value: By releasing equity from the property, individuals can reduce the overall value of their estate subject to inheritance tax. This can be especially advantageous for individuals whose properties represent a substantial portion of their net worth.
- Preservation of property ownership: Equity release allows individuals to remain in their homes while accessing cash, providing financial flexibility without the need to downsize or relocate.
- Tax efficiency: The funds released through equity release are typically not subject to income tax, making it a tax-efficient way to access cash in retirement.
Considerations:
- Interest accumulation: With lifetime mortgages, interest accrues on the loan, potentially reducing the inheritance left to beneficiaries. It’s essential to consider the long-term implications and discuss them with financial advisers.
- Impact on eligibility for means-tested benefits: Releasing equity from the property could affect eligibility for means-tested benefits or grants. Individuals should carefully evaluate the potential impact on their financial situation.
- Family discussions: Equity release decisions can have implications for heirs and beneficiaries. It is essential to have open and transparent discussions with family members to ensure everyone understands the implications and is comfortable with the chosen strategy.
In conclusion, equity release can be a valuable tool in inheritance tax planning, providing access to liquidity, reducing estate value, and preserving property ownership while offering financial flexibility in retirement.
As I have pointed out earlier, there is little point in considering this type of arrangement unless it is as part of a considered planning strategy.
It is possible to invest the proceeds into a Business Property Relief Arrangement (BPRA), which can mean that the sum you invest is outside of your estate after two years.
Some of the BPRA schemes offered by institutions are inherently risky.
It is possible to establish a bespoke scheme that can mitigate some of the risks and put you in control of the outcome, which can be worthwhile considering.
Property Landlords: Gifting Properties to Reduce Capital Gains
Property landlords often hold substantial assets in the form of real estate properties. When considering estate planning, gifting properties strategically can be a powerful tool to not only reduce potential capital gains tax liabilities but also lower the overall value of their estate subject to inheritance tax. This proactive approach allows landlords to transfer assets to beneficiaries while optimizing tax efficiency and preserving wealth for future generations.
Understanding the Strategy:
When property landlords gift properties to beneficiaries, they effectively transfer ownership of the assets, removing them from their own estate. By gifting properties with low or no capital gains, landlords can minimize the tax implications associated with transferring ownership, as properties transferred at a lower value may incur reduced capital gains tax liabilities.
Benefits of Gifting Properties in Estate Planning:
- Tax efficiency: Gifting properties strategically can result in significant tax savings by minimizing capital gains tax liabilities and reducing the taxable value of the estate subject to inheritance tax. By leveraging available exemptions and reliefs, landlords can optimize their tax position and maximize the wealth passed on to beneficiaries.
- Seamless asset transfer: Transferring properties to beneficiaries through gifting allows for the seamless transfer of ownership, avoiding the delays and administrative complexities associated with probate. This ensures that beneficiaries can access and benefit from the properties without disruption or uncertainty.
- Wealth preservation: Gifting properties enables landlords to preserve wealth for future generations by transferring assets to beneficiaries during their lifetime. This proactive approach allows individuals to support their loved ones financially while minimizing tax liabilities and ensuring the efficient transfer of assets.
- Family legacy: Gifting properties can be a meaningful way for landlords to leave a legacy for their family members, providing them with valuable assets and opportunities for financial security and prosperity.
Considerations when Gifting Properties:
- Capital gains tax implications: Landlords should carefully consider the capital gains tax implications of gifting properties, including any potential tax liabilities arising from the transfer of ownership. Seeking advice from tax professionals can help landlords assess the tax consequences and optimize their gifting strategy accordingly.
- Valuation and timing: Proper valuation of properties and strategic timing of gifts are essential considerations when implementing this strategy. Landlords should assess the current market value of properties and consider factors such as property appreciation, potential tax implications, and personal circumstances before making gifting decisions.
- Legal and financial advice: Gifting properties involves complex legal and financial considerations, including property law, tax regulations, and estate planning implications. Landlords should seek advice from legal and financial professionals to ensure compliance with relevant laws and maximize the benefits of this strategy.
In conclusion, gifting properties strategically is a valuable strategy in estate planning for property landlords, offering tax efficiency, seamless asset transfer, wealth preservation, and the opportunity to leave a lasting family legacy. By carefully considering the implications and seeking professional advice, landlords can optimize their gifting strategy to achieve their estate planning goals and secure the financial well-being of their loved ones for generations to come.
Consider the Use of a Revocable Discretionary Trust
A revocable discretionary trust is a sophisticated estate planning tool utilized by affluent individuals to effectively manage their assets, reduce inheritance tax burdens, and maintain a degree of control over the distribution of wealth to beneficiaries. This trust structure provides a balance between asset protection, tax efficiency, and flexibility in estate planning strategies.
Understanding Revocable Discretionary Trusts:
In a revocable discretionary trust arrangement, the individual establishing the trust, known as the settlor, transfers assets into the trust, which are then overseen and managed by appointed trustees. Unlike irrevocable trusts, which cannot be altered once established, a revocable trust allows the settlor to retain the ability to modify or revoke the trust during their lifetime. This level of flexibility is particularly advantageous in responding to changes in personal circumstances, tax laws, or financial objectives.
The trustees of the revocable discretionary trust are granted discretionary powers regarding the distribution of trust assets among the beneficiaries named in the trust deed. Unlike fixed-interest trusts, where beneficiaries have predetermined entitlements to trust assets, discretionary trusts empower trustees to distribute assets based on beneficiaries’ needs, circumstances, and tax planning considerations.
Benefits of Utilizing a Revocable Discretionary Trust in Inheritance Tax Planning:
- Tax efficiency: Assets held within a revocable discretionary trust are often not considered part of the settlor’s estate for inheritance tax purposes. By removing assets from direct ownership and placing them into trust, individuals can potentially reduce the overall value of their estate subject to inheritance tax, leading to substantial tax savings for beneficiaries.
- Asset protection: Trust assets are shielded from various risks, including creditors’ claims, divorce settlements, or bankruptcy proceedings against beneficiaries. This protective measure ensures that family wealth is preserved and safeguarded for intended beneficiaries, even in the face of unforeseen circumstances.
- Control and flexibility: Despite relinquishing legal ownership of assets transferred into the trust, the settlor retains significant control over trust management and distributions. This level of control allows for adaptability in responding to changing circumstances, ensuring that the trust remains aligned with the settlor’s intentions and objectives.
- Continuity in wealth management: Establishing a revocable discretionary trust facilitates the seamless transition and ongoing management of assets across generations. By entrusting trustees with the responsibility of managing trust assets, individuals can ensure the continuity of wealth management practices and the preservation of their legacy for future generations.
Considerations When Establishing a Revocable Discretionary Trust:
- Professional guidance: Given the complexity of trust structures and estate planning laws, seeking advice from experienced legal and financial professionals is essential to ensure the proper establishment and administration of a revocable discretionary trust.
- Selection of trustees: Choosing trustees who are reliable, competent, and trustworthy is paramount to the success of the trust. Trustees must act in the best interests of the beneficiaries and exercise discretion judiciously in accordance with the trust deed.
- Regular review and monitoring: It is important to periodically review and monitor the performance of the trust, as well as any changes in personal circumstances or legal requirements. This ensures that the trust remains effective and aligned with the settlor’s wishes and objectives over time.
In summary, a revocable discretionary trust offers affluent individuals a powerful mechanism for estate planning, asset protection, and tax optimization. By leveraging this trust structure, individuals can minimize inheritance tax liabilities, preserve family wealth, and maintain control over the distribution of assets to beneficiaries. However, careful planning, professional guidance, and ongoing management are essential to maximize the benefits and navigate the complexities associated with revocable discretionary trusts.
Conclusion
In conclusion, if you have an estate valued over £2m it is worthwhile carrying out inheritance tax planning.
If you intend to do your own planning, I suggest that you first read a standard guide to Inheritance Tax.
Our “Inheritance Tax Simplified” is a 300-page book packed with information and advice.
To purchase a book please fill out the form on the right.
If you seek professional planning advice, then we are happy to assist you to transfer wealth to loved ones and reduce inheritance tax.
We are able to leverage the various exemptions and allowances provided by legislation and ensure the efficient transfer of assets to future generations.
Links to Other Articles
Ray Best
Like his academic development, writing came late to Ray. He has written several published works, “Inheritance Tax Planning – My Way” and “Shareholder Protection & Partnership Protection” and has had four feature articles published in Tax Adviser magazine, but the publication he is most noted for is the joint collaboration with Tony Granger “Inheritance Tax Simplified”.
