Guide to Inheritance Tax & Estate Planning and how you may be able to mitigate any liability – Part 2

Estate Planning Options – what can you do?

1. Lifetime Gift to a Discretionary/Flexible Trust

If you do not need access to an element of your capital, you could gift that capital into a discretionary trust. A trust is a legal arrangement you can create where the gifted asset is held by a trustee or group of trustees, for the ultimate benefit of a named third party (your beneficiary(s)).

With such a trust, you retain ongoing control over the direction of the capital, e.g. who the beneficiaries are when capital is allocated to beneficiaries and how much is distributed. You can also appoint extra trustees who can fulfil your wishes after death.

A gift into a discretionary trust is treated as a chargeable lifetime transfer (CLT). There would be no immediate tax to pay on cumulative chargeable lifetime transfers in the previous seven years up to the £325,000 limit.

There would also potentially be tax payable at subsequent 10-year anniversaries, or when capital is distributed from the trust. The maximum periodic/exit charge would be 6% of the excess over the nil rate band.

Gifts to individuals and to trusts can be effective elements of an estate planning strategy but if you gift capital, you reduce your wealth and potentially the income that you can generate. There are, however, options available that can provide you with an ongoing income if desired and, in certain cases, access to capital whilst also proving effective from an IHT perspective by reducing the value of your estate. These options tend to fall into two categories, trust-based and non-trust based investments.

2. Trust-Based Investments

Insurance companies offer various products that can provide significant IHT savings for investors. The products are typically ‘investment bonds’ which will be contained within a trust. The trust and legal documentation can be prepared and provided by the insurance companies themselves without cost.

I have provided an overview of the two main types of trust below.

• Loan Trusts

If you invest an element of your capital within a loan trust you can:

• Ensure future investment growth on this capital is outside of your estate with no IHT to pay on it
• Enjoy an ‘income’ by drawing on the loaned capital held within the trust.
• Access and recall the capital that you loan.

This type of arrangement can be highly effective as a form of estate planning as it freezes the capital in your estate for IHT purposes but can also reduce the value of your estate without you having to give up control over the capital or lose the ability to derive an ‘income’ from that capital.

A loan trust arrangement is a long-standing, and highly effective means of gradually reducing the value of your estate over time (as long as the loan repayments are spent!) and ensuring future investment growth falls outside of your estate. It enables you to provide a fund for beneficiaries outside of your estate, retain control over the capital loaned and generate an income from that capital should you wish to do so.

• Discounted Gift Trust

Again, this is a trust-based arrangement using an investment bond. The invested capital is used to provide you with a fixed level of income each year until death. A discounted gift trust essentially splits a capital investment into two elements, namely:

1. A ‘discount’ element, the value of which falls immediately out of your estate for IHT purposes.
2. A ‘gift’ element, the value of which falls out of your estate once you have survived seven years from the date the trust is established.

A discounted gift trust can achieve an IHT saving over a much shorter, accelerated period with an element of the investment falling out of your estate immediately (with the rest after seven years). The limitation of a discounted gift trust is that it cannot be unwound.

In comparison, a loan trust represents a more gradual form of longer-term estate planning. The key attraction of the loan trust is that it gives you security and control. Unlike an outright gift or transfer into trusts, you do not lose control over the capital loaned and can unwind the arrangement and have the outstanding balance of the loan repaid.

These two arrangements can also be used together as part of an overall estate planning strategy.

3. Tax Incentivised Investments

There are types of investments that are advantageous from an estate planning perspective and do not involve the use of trusts. These investments typically focus on the use of Business Relief (BR) to ensure that any capital invested qualifies for 100% relief from IHT after two years.

There are no trusts involved here, so these arrangements can be viewed as simpler and more straightforward. Some types of Business Relief arrangements can also be used to generate an income.

In most cases, the underlying investments used within these arrangements are high risk. Some BR qualifying products will invest in private companies and/or those listed on the AIM market. These are smaller companies, quite often illiquid, that can be highly volatile with returns that fluctuate widely. Whilst these arrangements can be highly effective from an IHT perspective, investors need to be comfortable with the elevated levels of investment risk that typically come with them.

It is important to look at the underlying investments here and not just the tax advantages.

4. Protection

The estate planning options outlined above all cover things you can do during your lifetime to mitigate an IHT liability on your estate.

An additional approach is to accept that there will be an IHT liability and arrange life assurance so that a lump sum is paid to your beneficiaries to help them pay the tax. This would involve taking out a whole of life policy to pay out a sum assured on death (on the death of the surviving spouse for married couples).

There is a cost for this life assurance, and that premium cost is higher than for a term assurance policy because there is a guaranteed payout under a whole of life policy. How attractive this is, depends on how long you live and how many years you will need to pay the premiums.

A number of unknown factors make it very difficult to predict and target any potential tax liability accurately, but life assurance can still serve a useful role in helping to provide your beneficiaries with capital promptly.

Any such policy should be written under a trust to ensure the benefit does not fall into your estate and to enable the proceeds to be immediately paid to your beneficiaries.

Inheritance Tax can be a complex subject and it is important to seek professional advice along the way from an Inheritance Tax and estate planning specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. It is not an offer to purchase or sell any particular asset and it does not contain all of the information which an investor may require in order to make an investment decision. It is based upon our understanding and interpretation of HRMC practice and current legislation Always obtain profession advice before entering into any new financial arrangement.

The Financial Conduct Authority does not regulate tax or estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on your individual circumstances. Some IHT planning solutions may put your capital at risk you may get back less than your originally invested.

Guide to Inheritance Tax & Estate Planning

(And how you may be able to mitigate any liability – Part 1)

Inheritance Tax (IHT) – what is it?

Inheritance tax is a 40% tax applied to estates worth over £325,000 after a person dies. The £325,000 threshold is potentially higher where the individual has inherited a partner’s exempt amount, or if a home is left to children or grandchildren.

1. What’s included in the estate?

The value of your estate for the purpose of inheritance tax includes:

• Your investments & savings – although usually, pensions are exempt
• Any possessions you hold including property
• The value of any money or property you gave away during the seven years prior to death

2. Understanding the nil-rate band

There are several rules and exceptions regarding Inheritance Tax meaning it can get quite complicated, however, understanding the nil-rate band is key.

The nil-rate band is effectively a personal IHT allowance. Everyone receives their own £325,000 nil rate band and will only be liable for Inheritance Tax on the value of their estate that exceeds this value. Any unused percentage of the allowance can be passed on to a surviving spouse and would be claimed on the second death.

If you leave your main property to your children or your grandchildren (including adopted, foster or step-children), you may gain an additional IHT-free allowance of £175,000 which can be offset against the value of the property also referred to as the Residence Nil Rate Band (RNRB). This additional exemption will also be available where someone who has died sold their home or downsized on or after 8 July 2015.

In summary, a person can pass on up to £500,000 completely free of IHT and the combined allowances for a married couple is £1,000,000.

However, It is important to highlight that some of wealthiest estates may not be able to benefit from the RNRB. Estates worth over £2,000,000 will start to lose the RNRB, as it will be withdrawn at a rate of £1 for every £2 over £2,000,000.

This means that based on the RNRB figure of £175,000 in 2022/23, there will be no RNRB if the estate exceeds £2,350,000 for an individual or £2,700,000 for a married couple.

3. What’s exempt from Inheritance Tax?

• If you leave your whole estate to a husband, wife or civil partner then no Inheritance Tax will be payable.
• If a husband, wife or civil partner doesn’t use all of their £325,000 tax-free limits, then any unused part can be passed on to their surviving partner.
• You don’t need to pay Inheritance Tax on anything you leave to charity. And if you leave 10% or more of your estate to charity, then a reduced rate of 36% tax may apply to what is left over. Special rules apply though so seek legal advice if you are planning to do this.
• Gifts out of income that are part of your normal expenditure and which do not have a material

impact on your standard of living are normally exempt from IHT. (This exemption is often used to make regular monthly contributions into investments vehicles for children/grandchildren.)

• Gifts of up to £3,000 in each tax year are exempt from Inheritance Tax, as are small gifts up to £250 to individuals and some wedding or civil partnership gifts. Be aware that larger lifetime gifts could become liable for Inheritance Tax, depending on how much they were and when they were given.

It is good practice to keep a record of gifts you make and which exemptions you are using. This will make the administration of an estate on death much more straightforward.

4. Outright Gifting

If you make other outright gifts to an individual, these are deemed to be Potentially Exempt Transfers (PETs). If you survive for more than seven years from making the gift, then the transfer is free of IHT and is not included in your estate on death.

On death within seven years of making a PET, the value of the PET is included in the estate calculations and uses the Nil Rate Band before it is applied to the rest of the estate. If the value of the ‘failed’ gifts, when added to any earlier gifts within seven years exceeds the £325,000 tax-free limit, IHT will become payable.

Please be aware an individual receiving the gift is primarily responsible for paying the IHT on a failed PET.

In simple terms, if you make a gift and live for a further seven years, that gift will not form part of your estate. If you do not survive the seven years, the amount of the gift will be brought back into the calculation, potentially resulting in an IHT liability on the amount gifted.

Once a gift has been made, you no longer have access to the capital nor can you derive any income from it. If those rules are breached, the gift runs the risk of falling foul of the ‘Gift with Reservation’ rules and it may remain within your estate for IHT purposes.

5. Things to consider before gifting

Lifetime gifts are often seen as a simple way to reduce inheritance tax, but as you can see above, it’s a complicated matter that needs serious thought.

As well as ensuring you abide by the rules, you’ll need to consider the affordability of giving gifts, without leaving yourself short in your later years – when you may need to pay for added expenses such as care or enhancements to your home.

You’ll also need to think about when you want your beneficiaries to gain access to the assets you gift them. For instance, you may want to give money to your children or grandchildren but retain control over what age they receive it. This can usually be done by placing the money into a trust.

Inheritance Tax can be a complex subject and it is important to seek professional advice along the way from an Inheritance Tax and estate planning specialist. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their investment and retirement planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

Please keep an eye on our blog posts/Linkedin to see part 2 of this ‘Guide to Inheritance Tax & Estate Planning, focusing on the different options for those looking to mitigate IHT.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. It is based upon our understanding and interpretation of HRMC practice and current legislation Always obtain professional advice before entering into any new financial arrangement.

The Financial Conduct Authority does not regulate tax or estate planning. Levels, bases of and reliefs from taxation may be subject to change and their value depends on your individual circumstances. Some IHT planning solutions may put your capital at risk so you may get back less than you originally invested.

General Housekeeping

We take a holistic approach to financial planning which means making sure every aspect of our clients’ financial requirements are considered and advise on each aspect of this where possible. We are the first to hold our hands up however to say we are not experts in everything and there are times that we need to refer our clients to other professional services firms to help complete the full service they require. At Five Wealth we have an extensive network of professional contacts that we work with and trust to provide our clients with a high quality service in their areas of expertise, including (but not limited to) solicitors, accountants and mortgage brokers.

Below are some of the main areas we look at as part of our clients’ financial planning “housekeeping”.

Wills

Creating a Will is one of the most important steps in ensuring that your assets pass on to those you wish to benefit from your wealth after your death. If you die without a Will in place, the estate is distributed under intestacy rules – more often than not this means that assets are not divided up as you would have wished or there are unintended tax consequences which could easily be avoided with proper planning.

A properly written Will can also help to protect family wealth or business assets through the use of trusts. A conversation with a solicitor that specialises in these areas can be worthwhile and can help ensure your wealth is passed on in the way you want it to be.

Where large estates are involved, a Will can help to distribute assets tax efficiently, making the best use of the available tax allowances such as the Nil Rate Band for Inheritance Tax. This could help maximise the value you are able to pass on to your heirs.

We have strong relationships with a number of Private Client teams and are always happy to put our clients in touch with a suitable solicitor if they wish to create or review their Wills.

Lasting Power of Attorney

A Lasting Power of Attorney (LPA) is a legal document that allows you (as the “donor”) to appoint one or more “attorney(s)” to make decisions on your behalf. Many people associate LPAs with taking control over a person’s assets when they are elderly and perhaps no longer able to make their own decisions, for example if they suffer from dementia. LPAs however can provide control and peace of mind over who takes control of your property in the event of an accident or illness that means you are no longer able to make your own decisions at any time in your life. An LPA provides the ability to appoint someone you trust to look after your affairs should you need them to – without this in place, you have to apply to the Court of Protection who can then appoint a “deputy” to act for you. This can however be a long and costly process so it is preferable to put an LPA in place whilst you can.

There are two types of LPA and you can choose to make one type, or both:

• Property & Financial Affairs – this gives authority for the attorney to manage the financial accounts (e.g. bank accounts, investments) of the donor. They have the power to make decisions about the donor’s money and property (e.g. paying bills or selling your home). This can be activated at any time and can be used whilst the donor retains mental capacity.
• Health & Welfare – this gives authority for the attorney to make decisions in areas such as the donor’s medical care, moving into a care home and life-sustaining treatment. It can only be used once the donor has lost mental capacity and is unable to make their own decisions.

In both cases, the LPA must be registered with the Office of the Public Guardian (OPG) before it can be used.

It can be difficult to think about what might happen if you have an unexpected accident or illness and many people put off doing anything to prepare for an unexpected event. An LPA can provide peace of mind should you lose the capability to manage your own affairs and we consider it to be an important part of our clients’ financial planning “housekeeping”.

Pension Death Benefit Nomination

Whilst a Will is important to set out how you would like your assets to be distributed on your death, it does not apply to pension funds. A separate Death Benefit Nomination, or Expression of Wishes, needs to be completed for each pension you hold to make sure that the funds can pass on to your chosen beneficiaries.

The nomination provides guidance to the pension provider of who you would want your pension funds to be paid to on your death. This can be anyone you want including family or friends, and can be changed at any time. Many providers now also allow you to give additional details of who you wish to receive the funds if they are unable to pay out to your chosen beneficiaries (for example if they have pre-deceased you). This allows for greater flexibility in passing on your pension death benefits in as tax efficient a way as possible.

We always make sure to cover this within our clients’ pension planning and will review their chosen nomination regularly to ensure it is up to date. It is often the case however that no nomination is set up on their existing or old pension schemes, or on workplace pension schemes. Many providers allow you to update your beneficiaries’ details online – it is worth checking your death benefit nomination regularly to make sure you have one in place and it is in line with your current wishes.

Tax

If you are self-employed or a high earner, chances are you already complete a tax return. There may also be a need to report tax to HMRC if you have rental income or taxable dividends on shares or an investment portfolio. If you are doing your tax return yourself, it is important to be aware of the deadlines for submission to HMRC – 31^st October after the tax year end for paper returns, and 31^st January if you complete a return online.

Sales from investment products can result in a tax charge meaning you have to complete a tax return where you may not normally do so. This includes sales from shares/investment funds that exceed the Capital Gains Tax (CGT) allowance (£12,300 for 2022/23), and withdrawals from investment bonds that result in a chargeable gain.

If you are married or in a civil partnership, it may be worthwhile restructuring investments before making a sale to maximise the use of your tax allowances – assets can be passed between spouses or civil partners tax free, which can mean you are able to use both partners CGT allowances or unused income tax allowances.

You should also make sure you are claiming tax relief on your pension contributions if you are a higher or additional rate taxpayer as you could be due a rebate of 20% – 25% of your gross contributions each tax year.

Whilst we have a broad working knowledge of legislation, Five Wealth Ltd are not specialist tax advisers and you should speak to your accountant if you require any specific tax advice. Our professional network includes a number of tax advisers and accountants, and we are always happy to refer clients to one of our contacts if they are looking for advice in these areas.

Mortgages

We often get asked if we advise on mortgages when clients are reaching the end of their current fixed term or looking to buy a new home. Unfortunately the answer to this is no, but we work with a number of mortgage brokers to help our clients find the best mortgage products for them.

It can be helpful to speak to a mortgage broker to find out how much you could borrow or how much your monthly repayments might be. Many brokers have access to lower mortgage rates and products that are not available on the open market, so you could benefit from applying through them.

Reviewing your mortgage regularly could help save you money on your monthly repayments, with some brokers offering an ongoing service to keep you updated on the latest rates and products available.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. Five Wealth Ltd offer independent financial advice to a wide variety of clients, at various stages throughout their financial planning journey. If you feel that our expertise would be beneficial to you, please get in touch.

The information contained within the article is based upon our understanding of HMRC legislation and practice at the current time. Allowances, reliefs and other tax legislation is subject to change and depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Will Writing, Tax Advice or Legal services.

Making use of the various gifting allowances and exemptions that are available can be a powerful way of reducing the value of your estate for Inheritance Tax (IHT) purposes, whilst potentially providing a meaningful benefit to your loved ones as and when they need it.

Generally speaking, IHT may have to be paid after your death on any gifts made in the 7 years preceding your death. A gift can be anything you give that has value, such as money, possessions, and property. It can also be something that has decreased in value. For example, if you sell your house for less than its actual value to your child, the difference could be classed as a gift.

In this blog post, we have provided an overview of five scenarios where gifts can be made free from IHT:

1. Using your annual exemption – You can gift up to £3,000 each tax year without the gift being added to the value of your estate. This is known as your ‘annual exemption’.

This can be made to one person or split between several people.

If you don’t use your full allowance in one tax year, this can be rolled over to the following tax year (but only for one tax year).

2. Using the small gifts exemption – You can make gifts of up to £250 per person each tax year without these being added to your estate.

The exemption is not available if a small gift is made to the same person that you have already gifted your £3,000 annual allowance to in the same tax year.

3. Making gifts out of regular excess income – There is no limit on any gifts made from excess income, which are immediately exempt from IHT, provided that:

• Making the gift does not impact on your standard of living.
• The gift forms part of your regular expenditure.
• The gift is made from income (as opposed to capital) – In practice, gifts (even if made out of income) will not qualify for the exemption if you have to resort to using capital to meet your normal living expenses as a result of making the gift.

A real-world example of this exemption would be a grandparent using excess pension income to pay for a grandchild’s school fees.

4. Wedding gifts – you can give a tax-free gift to someone who is getting married or starting a civil partnership, up to a value dependent on your relationship with the person getting married. You can gift up to:

• £5,000 to a child
• £2,500 to a grandchild or great-grandchild
• £1,000 to any other person

For the gift to be effective for IHT purposes, it must be made before the wedding (and the wedding has to happen!).

You can combine a wedding gift allowance with any other allowance, except for the small gift allowance. For example, you can give your child a wedding gift of £5,000 as well as £3,000 using your annual exemption in the same tax year.

5. Gifts to your spouse or a charity – There is no limit on any gifts made to your spouse or a charity, with these being immediately exempt from IHT.

Any gifts made in excess of the available allowances and exemptions will remain in your estate (and therefore are potentially liable for IHT) for 7 years from the date of the gift.

It is therefore very important that you keep a record of any gifts you make, including details of:

• The amount gifted
• The date the gift was made
• Who the gift was made to

This will make it easier to establish if there is any inheritance tax due on your gifts when you die.

If you would like further information on anything covered in this blog post, please get in touch.

The information featured in this article is for your general information and use only and is not intended to address your particular requirements. The article is based upon our understanding of HMRC legislation and practice. Tax rates and allowances relate to 2022/2023 tax year and are correct at the time of publication. Allowances, reliefs and other tax legislation is subject to change and depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Inheritance Tax Advice.

Sources of Information

At Five Wealth, we have a host of sophisticated investment analysis tools at our fingertips as well as direct access to fund managers, economists and professional advisers. But how does the average person stay up to date with what’s happening in markets? In this blog, I ask a handful of my colleagues the sources they would recommend to clients looking to stay in the loop.

Rick Gosling, Associate Director – Podcasts:

Part of an adviser’s job description means being out on the road visiting clients, even if video meetings are now a more accepted tool in the post-lockdown world. Any medium which allows me to absorb information whilst driving is therefore particularly useful. The number of podcasts available has skyrocketed over the past decade and there are several quality offerings available depending on your personal preferences.

My favourite is the Money Talks podcast from The Economist, which is a 45-minute-long show in an interview format released once a week. The topics are global in scope which can sometimes give a bit of perspective to investors who are used to seeing UK centric headlines every day. Recent topics covered include the global effect of economic sanctions on Russia, the success of private equity investments in recent times (& whether they can continue outperforming public markets) and the effect of high inflation expectations.

Other podcasts that are recommended include:

• BBC Radio 5 Live – Wake up to Money – If you aren’t up early enough to catch the radio show at 5am, it’s uploaded as a podcast after transmission.
• FT – Money Clinic with Claer Barrett – The FT’s money-making expert Claer Barrett responds to real-life money questions from a range of millennial guests.
• NPR – Planet Money – US based show with slightly shorter episodes at around 20 minutes that presents economic concepts in a way that’s entertaining and easy to digest.

Steve Jordan, Director – Business News:

A lot of my clients are business owners and professionals advising businesses. What this means is that is very important and useful for me to be aware of what’s going on in the Northwest and further afield in the business world. To do this I subscribe to The Business Desk, Business Insider and other news sites and receive the regular bulletins covering company news, deals, new hires etc. It means that when I’m talking to clients and contacts I am as informed as I can be about the wider market and what’s impacting them in their world – aside from their investments.

Phillip Dewhurst, Director – Newspapers:

Whilst I do have various apps on my mobile phone that allow me to follow markets closely, I also enjoy the traditional sources. Reading the Sunday papers means that I have a good feel for what’s en vogue and I often receive client queries off the back of particularly eye-catching headlines.

I’ll usually make sure I read the Financial Times – Weekend edition and the Sunday Times, both of which have excellent money sections. Quite frequently there is an article written by Simon Edelsten, manager of the Artemis Global Select Fund, who is a fund manager I respect very highly. Even at challenging moments for investors, which we have seen plenty of in recent years, he always provides a useful reminder of investment fundamentals which tend to be the basis of a sound investment strategy.

It’s important to maintain a critical eye when reading the papers and be wary of sensationalist headlines. It’s also important to remember that many of the UK papers have a focus on the UK market and the FTSE 100. Whilst that is understandable, all of our clients will have a diverse geographical spread within their investment portfolios and so I’d encourage them to ensure they are looking at the bigger picture, whilst also bearing in mind that not everyone is suited to taking the same level of risk within their investment strategy.

Liz Schulz, Associate Director – Social Media:

As well as the more formal offerings that my colleagues have covered above, I also like to use social media as a quick way to keep on top of industry topics and discussions as well as local business news. Whilst naturally any social media has to be taken with a pinch of salt, there is useful content given out daily from both companies and peers. A few accounts worth a follow are:

• @PensionCraft (weekly updates on markets and performance) – Twitter
• @CitywireWealth (articles on current topics, aimed towards investment professionals) – Twitter
• @pensionstully (technical and pension views) -Twitter
• Christopher Maguire | LinkedIn (a ‘good news blog’ every Friday covering wins across the Manchester business space)

And whilst not necessarily industry specific, for a more light-hearted read the regular updates appearing from our charity of the year Support Dogs (Support Dogs: Overview | LinkedIn) are always very welcome.