Passing on your wealth

How to make sure loved ones get your hard-earned money and not the taxman

Financial planning doesn’t end at your retirement. For most of us, protecting our savings for those we leave behind is a priority, even if it means making tough decisions today. It makes sense to plan for the future, whether it is for yourself or your business. Tailored wealth succession planning enables a smooth transition to the next generation. It also helps minimise tax liabilities.

Organising your financial affairs well in advance
Trusts and inheritance tax (IHT) planning – and the right advice – can help you and your family avoid making the taxman your largest beneficiary when you die. So, to make sure that the right people benefit from the estate you leave behind, it makes good sense to organise your financial affairs well in advance.

Nothing is certain but death and taxes
When Benjamin Franklin said, ‘In this world nothing is certain but death and taxes’, he probably hadn’t made a will and ensured through careful planning that the taxman would not be the first in line with a claim on the Franklin estate. Your estate is basically everything you own, including any property, such as your home, your car, your life assurance policies and any other investments. It also includes any valuable items such as jewellery.

Lots of ways to manage your IHT bill
But there are lots of ways to manage your IHT bill long before you even get to that point. The basic premise is that when you die, the value of all your assets, whether property, investments, the odd Cezanne you might have stashed away or even life insurance payouts are added up. Take away the current 2012/13 IHT threshold of £325,000 and whatever is left is subject to a 40 per cent tax charge. So if your assets are worth £450,000, the bill your heirs face would be 40 per cent of £125,000 – that’s £50,000.

Couples in registered civil partnerships or marriages can leave their entire estate to their spouse when they die. When the remaining spouse dies, the estate gets the double allowance – in other words currently £650,000 – before IHT is payable.

Being generous while you’re still breathing
After that, it’s all about being generous while you’re still breathing. You could reduce your IHT rate to 36 per cent by giving money to charity during your lifetime. You can give away cash up to £3,000 a year free of IHT (gifting £3,000 from the previous tax year if not used), or as many small gifts of up to £250 per individual as you like. Or you could give away the lot and potentially sidestep IHT (as long as you don’t receive any benefit from the assets), including putting assets in trust for a beneficiary. This can be particularly effective when it comes to life insurance policies.

The basics of how to limit your inheritance tax liability
Make a will. By writing a valid will you can make sure that your estate goes to the people you want it to.
Transfer unused tax-free allowances. Spouses and registered civil partners can inherit from each other without paying IHT. Your executors can also use any unused nil-rate band from your deceased spouse or civil partner’s estate.

Make gifts. The tax rules allow you to make certain gifts out of your estate that are immediately exempt from tax and others on which the IHT liability reduces gradually. Any gift made more than seven years before your death is exempt from IHT.

Use a trust. A trust is an arrangement that can help you to remove money from your estate so that it may not be liable for IHT in the future. There are different types of trusts for different circumstances. Investment bonds, life assurance policies and pensions can all be protected from IHT by using an appropriate trust. Some trust arrangements even allow you to receive a regular payment from your investment during your lifetime.

All figures relate to the 2012/13 tax year. Taxation levels and the basis of reliefs are dependent on current legislation, individual circumstances are not guaranteed and may be subject to change. The Financial Services Authority does not regulate estate planning, wills or trusts.

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