Recent research carried out by Hazlewoods, found that we are a ‘live for today’ nation. Almost two-thirds (64%) of people surveyed said their priority was to have enough money to live the lifestyle they choose now ahead of planning for their children’s inheritance and their future care.
However, some simple planning could help to ensure the best of both worlds, by continuing to enjoy the life you are accustomed to today, whilst also putting in place plans for future generations.
Some simple areas to consider include:
Wills
Ensuring that a Will has been made and has been drafted tax efficiently. Once made, periodic reviews should be carried out and updates made for any changes required. This could be due to a change in family circumstances or changes in legislation.
One example of this could be to take advantage of the residence nil rate band(RNRB) recently introduced to enable the family home to be passed on to direct descendants (e.g. children, grandchildren etc.).
Pensions
The 2015 pension’s reform brought about increased flexibility for pensions. The changes included allowing unused pensions to be tax free (if death occurs before the age of75) or taxed at the marginal rate (if death occurs after the age of 75) as drawn down by the person inheriting. Previously, unused pensions were taxed at 55%. The pension pot will also fall out of an individual’s estate for inheritance tax purposes.
Coupled with the tax relief available for making pension contributions, this can prove a tax efficient way to pass on income to future generations, whilst reducing the value of your estate.
NIL rate band
Based on current rates, the first t£325,000, of an individual’s estate (known as the nil rate band (NRB)), will not be subject to inheritance tax (IHT). Utilising the NRB by making chargeable lifetime transfers of £325,000 and other (potentially exempt) transfers of more than this. These will fall out of account after seven years.
IHT exemptions
Certain gifts made during your lifetime are exempt from IHT. This includes gifts between spouses, charitable donations, a £3,000 annual exemption, small gifts of up to £250 and wedding gifts (up to certain values).
IHT reliefs
There are two main reliefs from IHT, business property relief and agricultural property relief. These reliefs effectively remove the value of many business interests and farms from the charge to IHT.
Ensuring that your business qualifies for relief is key, as the position is not always straightforward. Some simple planning as to whom the business is left can also ensure significant IHT savings. This could include leaving business assets to your children or the use of a trust.
Gifts to charity
Providing for a charitable legacy in your Will could reduce the applicable IHT rate from 40% to 36%. At least 10% of the value of the net estate at the date of death must be gifted to charity.
Use of trusts
Lifetime transfers into most trusts are chargeable to IHT. If the chargeable trust assets are greater than the available NRB, IHT charges will arise on gifts into the trust, every ten years and when the assets exit the trust. The IHT charges in trusts are still lower than death rates, so trusts with assets greater than the NRB can still be useful in IHT planning and certainly for asset protection