- Make a Will
An important element of sound estate planning is to make a Will – unfortunately 70 per cent of adults with children under 18 fail to do so.
This is mainly due to apathy but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a Will ensures your assets are distributed in accordance with your wishes.
This is particularly important if you have a spouse or partner as there is no inheritance tax payable between the two of you but there could be tax payable if you die intestate – without a will – and assets end up going to other relatives.
2. Make allowable gifts
You can give cash or gifts worth up to £3,000 in total each tax year and these will be exempt from inheritance tax when you die.
You can carry forward any unused part of the £3,000 exemption to the following year but then you must use it or lose it.
Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.
3. Give away assets
Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift and provided the parents survive for seven years after making it, the money automatically ends up outside their estate for inheritance tax calculations – irrespective of size.
4. Make use of trusts
Assets can be put in trust, thereby no longer forming part of the estate.
There are many types of trust available and can be set up simply at little or no charge. They usually involve parents (called settlors) investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors the investment is paid out according to the settlors’ wishes. In most cases this will be to children or grandchildren.
5. The income over expenditure rule
As well as putting lump sums into a trust you can also make monthly contributions into certain savings or insurance policies (not Isas) and put them in trust.
The monthly contributions are potentially subject to inheritance tax but if you can prove that these payments are not compromising your standard of living they are exempt.
6. Invest in Business Property Relief Products
These are very effective and can save your estate a great deal of IHT. Unfortunately they are not great for capital growth but they are useful for capital preservation. You can also give these directly to your children or grandchildren without attracting IHT. In effect taking them out of your estate without any liability.
However, you can not raise debt on other assets in order to invest in a BPR product. You should talk to your IFA to find out which are the best products in the marketplace, which have consistently done well.
7. Provide for the tax
If you are not in a position to take avoiding action, an alternative approach is to make provision for paying inheritance tax when it is due.
The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate the executor – usually a son or daughter – will often have to borrow money or use their own funds to pay the inheritance tax bill.
This is where life assurance policies written in trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death.
The amount of cover should be equal to the expected inheritance tax liability. By putting the policy in trust it means it does not form part of the estate.
The proceeds can then be used to pay any inheritance tax bill straightaway without the need for the executors to borrow.
Please contact me on [email protected] or 0800 061 4494 to find out how I can best help you protect your family and your assets.