We've finally made it through January, the gloomiest month of the year, and probably the worst in a long time thanks to the ongoing lockdown. One thing the pandemic has encouraged many of us to do is review our personal affairs, but this time I'm not here to tell you about the importance of making or reviewing your Will (although this is always encouraged!). Instead, as we look ahead into this new year, and also approach the end of the tax year in a couple of months, I thought it would be useful to set out a brief reminder of some basic estate planning opportunities, particularly for those who may wish to plan for a potential inheritance tax (“IHT”) liability.
Make use of your exemptions and allowances
If you are concerned about planning for IHT then this is often the best place to start. Very broadly speaking, the value of a gift of money or property will still be treated as part of your estate for the purposes of calculating IHT for a period of 7 years from the date of the gift. This is known as a potentially exempt transfer (“PET”). However there are some exemptions to this rule and some annual allowances, which enable you to gift assets in the knowledge that the value will immediately be brought outside of your estate for IHT:
- Provided both are domiciled in the UK, gifts between spouses are always exempt from IHT, no matter the value of the transfer;
- Gifts to qualifying charities and political parties are also exempt;
- An individual can make unlimited small gifts of up to £250, although this is usually a drop in the ocean when reviewing a potential IHT liability!
- Individuals can make gifts totalling £3000 per annum and can also carry over an unused allowance from the previous tax year;
- Wedding/civil partnership exemptions enable a parent to gift £5000, a grandparent to gift £2500 and any other individual to gift £1000 to a couple getting married or entering a civil partnership.
In addition to the above exemptions and allowances, there is a lesser known exemption which covers normal expenditure out of income. Where an individual can establish a regular pattern of giving, which comes purely from excess income and not from capital, and which enables him or her to maintain their usual standard of living, then these gifts would not be counted as PETs for IHT purposes. This is a valuable but often under-used exemption which effectively prevents excess income being converted into capital and thereby increasing the value of a person's estate. It is certainly worth some consideration where an individual has the means to achieve it, but I would recommend taking advantage of this exemption while it lasts. Post-Covid, it's foreseeable that such a wide and generous exemption could be withdrawn as part of an effort to increase tax revenue in coming years.
Take advantage of available reliefs
Agricultural Property Relief and Business Property Relief apply to agricultural and business assets which meet certain criteria. For those you who are neither famers nor business owners, it is still possible to take advantage of these reliefs by investing in certain qualifying assets
Other lifetime gifting
In addition to outright gifts to individuals, you may wish to consider settling assets into trust. This enables you to benefit family members or other individuals of your choosing, but in a way that is more controlled and carefully managed. Subject to a few exceptions, gifts into trust will normally be taxed at the lifetime rate of 20% for IHT (for gifts over and above £352,000 per person), rather than being treated as a PET. It is also important to take appropriate advice from a tax advisor regarding the tax treatment of the trust fund during the trust period, which will normally be taxed under the “relevant property regime”. Trusts are also subject to income tax and capital gains tax.
Certain other trust structures in the form of discounted gift trusts or gift and loan trusts allow individuals to make a gift and decrease the value of their estate for IHT purposes while still receiving an income.
Another option may be a family investment company (“FIC”). In recent years FICs have been growing in popularity and are often now favoured over discretionary trusts, especially by clients who are familiar with the operation of a company structure, but less familiar with how trusts operate. FICs enable an individual to transfer wealth to the younger generations, whilst maintaining an element of control. He or she normally makes a gift to children, for example, who then use the cash to subscribe for shares in the FIC. Different share classes provide the younger generations with rights to capital and income, while the older generations retains the control and decision-making powers. The current rate of corporation tax can also be seen as favourable over the current regime for the taxation of trusts.
Review your Will
Despite what I said in the introduction, it's just not possible to talk about estate planning and not mention Wills! Make sure your Will is up to date and take advice on how it may be structured so that it is as IHT-efficient as possible.
Deed of Variation
Effectively a form of after-death planning, deeds of variation allow family members to vary a deceased person's Will within two years of death, and are useful in altering the distribution of the estate to make it more IHT-efficient. Or indeed the distribution of the estate can be altered as part of an estate planning exercise by one of the beneficiaries, commonly the surviving spouse. However deeds of variation have long been viewed as ripe for abolition, and so their availability after death should not be taken for granted.
General tax planning
Aside from IHT planning, it's always worth reviewing your general tax affairs with a qualified advisor, with a view to taking advantage of any available allowances or reliefs before the end of each tax year, for example topping up ISAs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.