If you are wanting to leave a legacy for your children and future generations, here are some tax-efficient strategies:
Use Your Annual Gift Allowance
You can give away £3,000 each year tax free to one or more people. And any unused part of this allowance can be carried over to the following year - but this can be done for one year only.
If you give away more than £3,000 a year and you die within seven years of giving it away, then the recipient/s of your gift will be subject to tax on a sliding scale. This is known as a potentially exempt transfer. The maximum tax rate is 40% based on based on death within three years, and this reduces to zero by the eighth year. This is known as a ‘potentially exempt transfer’.
Use Your Small Gifting Allowance
You can give away up to £250 to an unlimited number of people each year tax free, in addition to your annual gift allowance. However, you cannot use this allowance with any other allowance and, if one person receives more than £250, then the gift will not be regarded as exempt for tax purposes.
Get Married or Formalize Your Relationship!
The biggest concern for people seeking to pass their wealth to the next generation is avoiding inheritance tax (IHT).
Inheritance tax is charged at a rate of 40% on any wealth in excess of the inheritance tax threshold of £325,000. This is called the nil rate bands. So, if your estate is valued at £500,000, the inheritance charge will be £70,000 because the difference between £500,000 and £325,000 is £175,000 which is taxed at 40%.
However, husbands, wives and civil partners (but not unmarried couples) do not pay IHT, and they can inherit each other’s nil rate band on death. This means that an entire estate, irrespective of value, can be transferred to a spouse or civil partner without being subject to inheritance tax. And, in the event of the second spouse’s death, the £325,000 nil rate band is doubled to £650,000.
In the example above, an estate worth £500,000 would not be liable for any inheritance tax because the nil rate bands have been applied from both partner’s on death.
It is important to make sure that you have a legally-binding will and that your relationships are formally recognized in the UK for this to apply.
36% Inheritance Tax Rate
The nil rate band can be further reduced to 36 per cent if at least 10% of the estate is left to charity.
Make Use Of Wedding Presents
If a wedding is planned then make sure you use your wedding gift allowance to make gifts to the betrothed that are free of tax:
• Each parent can give cash or gifts worth £5,000 to the couple getting married
• Grandparents can give cash or gifts worth £2,500
• Anyone can give cash or gifts worth £1,000
The gifts must be made on or shortly before the wedding and there is no exemption to tax if the ceremony is called off.
Make Use of Trusts For Life Assurance
A trust is a legal means of allowing a gift to be made to someone without giving them control over the gift. They are commonly used for life assurance policies that are designed to pay out on death to meet a potential inheritance tax liability or to legally move money outside estate in the form of premiums.
The person who places the gift in trust is called the ‘settlor’ and the person or people who will receive the gift are called the ‘beneficiary’. The people in charge of the trust are called the ‘trustees’ and they are responsible for executing the trust to fulfill the wishes of the settlor.
The most common form of trusts for wealth planning is discretionary trusts that are used to ‘ring fence’ life assurance policies, and provide these benefits:
• The death benefit is paid into the trust and the trustees pay it out to the beneficiaries as they see fit.
• There is no delay for probate.
• There is no potential for inheritance tax, income tax and capital gains tax up to the nil rate band allowance - as long as the payments to the life assurance policy do not exceed annual gift and income allowances.
The legal and tax effects of a trust will vary depending on your individual circumstances and the circumstances of the beneficiaries.
Putting a life assurance policy into trust is a straight forward procedure and trust forms can be obtained from your Life Assurance Company or independent financial adviser. Your policies cannot be put into trust retrospectively.
You should be aware that, once a policy has been put into trust, it cannot normally be reversed. It is therefore important to make sure that the trust meets all your needs before you finalize it.
Make Sure You Plan Ahead
The rules and regulations around pensions, tax and finances are constantly changing and it’s important that you take advice about the options available to you when you are planning your wealth management strategies.
People often find it comforting to know that their financial affairs will resolve in a way that satisfies them in the event of their death, and planning is the best way to achieve this.
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