Inheritance Tax Advisers

If your estate has a higher value than £325,000, it is likely that you will be liable to Inheritance Tax. Gifting assets to your spouse can reduce your estate for the purposes of Inheritance Tax along with gifts to charity.

There is an additional nil rate band of £175,000 available to each individual. This may be transferred to your surviving spouse on your death if you don’t use. It is only available to reduce the value of your only or main residence and must be passed on to a lineal descendent on death (children, grandchildren etc). The residence nil rate band is removed such that it decreased by £1 for every £2 that the estate exceeds £2 million in value. It can only be reduced to zero and it does not affect the main nil rate band.

If you gift your entire estate to your spouse, they will not pay IHT on your death.

Each individual may gift up to £3,000 to anyone for any reason each year and this is exempt from IHT. Gifts out of income are exempt from IHT, as long as they are out of surplus income, are regular, in the normal course of family life and do not impact on the donor’s standard of living. Any number of small gifts of up to £250 are exempt and do not impact on the £3,000 annual exemption. Wedding gifts up to a limit are also exempt.

A Family Investment Company (FIC) is a bespoke investment vehicle. It’s a company whose directors and shareholders are, usually, individual family members or those close to you.

An FIC can hold a wide variety of assets, including property and shares. It’s a flexible way to manage investments and decide how each member benefits, based on different share types. For example, directors, who are usually senior family members, can keep control by holding voting rights. Meanwhile, other shareholders, often children, hold non-voting shares. These members still receive economic benefits (profit distribution and capital growth, for example).

You could use an FIC as part of your Inheritance Tax strategy. It’s worth considering because the company’s assets are legally separate from your personal assets. That means the value of those assets does not form part of your estate, which reduces the total Inheritance Tax bill payable on death.

Potentially Exempt Transfers (PETs) are gifts made during a person’s lifetime that are not immediately subject to Inheritance Tax when the gift is made. However, it may be taxed should the donor pass away within seven years from the date of the gift.

The effective rates of tax on the excess over the nil rate band are:

• 0 to 3 years before death: 40%
• 3 to 4 years before death: 32%
• 4 to 5 years before death: 24%
• 5 to 6 years before death: 16%
• 6 to 7 years before death: 8%

A trust is a legal arrangement used to protect and pass on assets. One party (the settlor) gives someone else (the trustee) control of assets to manage for the benefit of a third party (the beneficiary).

Trusts can be a valuable tool for managing family wealth and planning for the future. This is because placing assets into a trust removes them from your personal estate. So, like a Family Investment Company, it’s another option for those planning their approach to Inheritance Tax.

Trusts come with a variety of tax and reporting requirements, so we recommend speaking to one of our advisers for more information.

It is important to make a will because:

• If you die without a will, there are certain rules which dictate how the money, property or possessions should be allocated. This may not be how you would have wished your money and possessions to be distributed.
• Unmarried partners and partners who have not registered a civil partnership cannot inherit from each other unless there is a will, so the death of one partner may create serious financial problems for the remaining partner.
• If you have children, you will need to make a will so that arrangements for the children can be made if either one or both parents die.
• It may be possible to reduce an estate’s tax bill if Inheritance Tax advice is taken in advance and a will is made.
• If your circumstances have changed, it is important that you make a will to ensure that your money and possessions are distributed according to your wishes. For example, if you have separated and your ex-partner lives with someone else, you may want to change your will. If you are married or enter into a registered civil partnership, this will make any previous will you have made invalid.