Estate planning 

Many of our clients would like to pass on wealth to their loved ones before and after they’re gone – and do so in the most tax-efficient way. There are various rules that govern the gifting of assets. Trusts can also play a key role in financial planning for individuals and families.

This is particularly the case when it comes to one of Britain’s most penal taxes – inheritance tax, levied at 40%. Our guide on trusts for inheritance tax planning contains further details.

Inheritance Tax Planning – key points to consider

Inheritance Tax (IHT) is often referred to as ‘the voluntary tax’ because there are ways in which it can be avoided.

Under current legislation, IHT is payable for on an individual estate where total assets exceed the Nil Rate Band of £325,000. For a couple the tax is only payable on the second death, assuming that all assets pass from husband to wife (or vice versa) on the first death.

The rate of tax is currently 40% on the excess, so for example, for a joint estate of £1,000,000, a tax of £140,000 (£350,000 @ 40%) would be payable.

While saving tax is important it should not be done to the detriment of the client’s own position. Sound responsible planning in this area looks at options that do not adversely impact the client’s own requirements which we believe should be the number one priority.

No one knows with certainty what lies ahead of so an appropriate element of flexibility is also key in this area of planning.

Points for consideration include:-

  • First value all assets to establish the value of individual and joint estate, and quantify what the current liability be?
  • Are there any special factors to consider e.g. health, or special family circumstances?
  • What is the current and projected annual cost of living and capital costs such as replacing cars etc.? Your target income, do you currently have surplus assets or surplus income?
  • What is the current and projected annual income post tax, and after meeting costs year by year does that leave surpluses or deficits?
  • What capacity exists, if at all to gift assets or surplus regular income so as not jeopardise in any way the financial well-being of the donor?
  • Do you have an up-to-date Will in place? And a Power of Attorney?

With good financial planning, these questions can be addressed in association with a lifetime cash flow model. This is very helpful for IHT considerations as the cash flow modelling adds an extra aspect, and provides detail and a clear visual presentation of the ‘what if’ scenarios.

Key factors

Prior to making any IHT planning proposals, clients normally have various ‘what if’ scenarios that could cause them concern, especially when looking at making significant gifts. Key factors might refer to

  • What if we decide to move house, or to spend significant sums on an existing house?
  • What if there were a significant fall in investment values?
  • What if we need to increase income for care costs?
  • What if the husband predeceases the wife, and vice versa, is there adequate planning provision on first death?
  • What if a family member needs an expensive private operation?
  • What if significant inflation returns?
  • What if the next generation needs capital for whatever reason?

Financial modelling combined with qualified professional advice will provide clear answers to these factors, which in turn provides clients with peace of mind of their financial future.

Main IHT options could include

  • Gifts direct to family
  • Gifts into trust
  • Loan trust
  • Discounted gift trust
  • Use of annual allowance
  • Gifts out of regular income
  • Life cover
  • Gifts to Charity

Each of these options have their own “pros and cons”, depending on the clients’ personal circumstances. This is where an individual consultation with a financial planner to discuss these further is advisable.

IHT planning can be a complex area with many moving parts to consider.

There are significant amounts of tax that can be saved, but care is required to ensure that the planning takes account, in advance, of the various what-if scenarios that can arise. Once gifts are made the access and control of the capital is gone.

In the right circumstances, significant savings can be made without adversely affecting the client’s own requirements, adding in flexibility and allowing clients to achieve their full financial promise, whatever the future may bring.