Estate preservation

Helping you to look after and maintain your wealth in the most efficient way

If you are UK domiciled, Inheritance Tax (IHT) is currently charged at 40 per cent and is payable on your estate once your net assets exceed £325,000. For some married couples and registered civil partners, any unused percentage of the available allowance from the estate of the first to pass away may be claimed when the second spouse dies. Once the domain of the super-rich, wide-scale home ownership and rising property values have meant that more and more people need to implement an estate preservation strategy to protect their wealth.

Make provisions for a will In the UK, if you don’t have a will, your estate will be distributed according to rules set out by law. These are known as the ‘Rules of Intestacy’. For example, in England and Wales, if you’re married with children, the first £250,000 of your estate (plus any personal possessions) would pass to your spouse. The remainder would be split, half going to your children when they reach the age of 18 and the other half used to generate an income for your spouse, passing to the children on your spouse’s death.

If you’re not married, your estate will go to your blood relatives, even if you’ve been living with someone for several decades. This could be far from what you wish. Think about where you want your money to go and why. A will makes your wishes concrete and clarifies who should get what, but can also be reviewed over time.

Life assurance
Life assurance can play a big part in your estate preservation strategy. Rather than reduce a potential IHT liability, by taking out a plan to cover your estate’s potential IHT liability and writing it in an appropriate trust, the payout can be used to meet any bills. More importantly, by putting it in an appropriate trust, it will be outside your estate so it won’t form part of your estate and will not be liable for IHT.

Give it away
Giving your wealth away to another individual while you are still alive could also reduce your estate’s exposure to an IHT liability. These transfers are potentially exempt from IHT and there is no limit on such transfers. This is an excellent way of transferring assets that you do not need to keep in your estate. However, it may be advisable to cover substantial gifts by insurance against death within seven years.

Any gifts you make to individuals will be exempt from IHT as long as you live for seven years after making the gift. If you give an asset away at any time but keep an interest in it – for example, you give your house away but continue to live in it rent-free – this gift will not be a ‘Potentially Exempt Transfer’.

If you die within seven years and the total value of gifts you made is less than the IHT threshold, then the value of the gifts is added to your estate and any tax due is paid out of the estate.

Some gifts are immediately outside your estate. You can give as many people as you like up to £250 each in any tax year. If you want to give larger gifts, either to one person or several, the first £3,000 of the total amount you give will be exempt from tax. You can also make a regular gift as long as it is out of your income and doesn’t affect your standard of living. A wedding or registered civil ceremony can also be a good
excuse for an IHT-exempt gift. A parent can give up to
£5,000, a grandparent £2,500 and anyone else £1,000.

Trust in your future
Utilising a trust could be useful if you want to give some money to, for example, your children or grandchildren but are concerned they might not spend it wisely during their teenage years. Or, if you wanted to give away capital while keeping control over how it is managed and, in some instances, still being able to receive an income from it.

Tax charges can also come into play on the money placed in trust; however, generally, if this remains below the nil-rate band, you won’t need to pay any tax, and in many cases it is likely that the level of tax suffered will be less than the 40 per cent headline IHT rate. ν

Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts. Levels and bases of, and reliefs from, taxation are subject to change and their value depends on the individual circumstances of the investor. The value of your investments can go down as well as up and you may get back less than you invested


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