With the question of long-term care cost high on the agenda, early consideration of inheritance tax (lHT) and succession planning is now more important than ever. In general people are living longer and many will require care at some stage of their life. Consequently the family home and other assets may become vulnerable to being lost in care fees if all other resources have already been used up. With careful, early planning there are things you can do to limit what goes to the taxman and maximise what you pass on to your loved ones.
With the question of long-term care cost high on the agenda, early consideration of inheritance tax (lHT) and succession planning is now more important than ever. In general people are living longer and many will require care at some stage of their life. Consequently the family home and other assets may become vulnerable to being lost in care fees if all other resources have already been used up. With careful, early planning there are things you can do to limit what goes to the taxman and maximise what you pass on to your loved ones.If you are sufficiently wealthy giving away assets in your lifetime can secure their succession to the persons of choice. Before giving away wealth you should first of all consider what is required for your own needs as your own financial security in old age is the most important thing. It is then possible to determine the sort of gifts you may wish to make to ensure they are carried out as tax efficiently as possible.
Gifting your surplus income can be a very useful and effective way of passing it to your beneficiaries while reducing your long term exposure to IHT. Gifts fall into two categories:
A: Exempt transfers
For a gift to be exempt from IHT it must be shown that a transfer of value meets the following three conditions:
1. The gift formed part of the transferor’s normal expenditure
2. The gift was made out of income (taking one year with another)
3. The gift left the transferor with enough income to maintain his or her normal standard of living
Critically, the source of the gift must be of income (eg pensions and earning) and not capital.
B: Potentially exempt transfers (PETs)
Some individuals have other assets such as investments and rental properties which will provide income and may choose to make a gift out of their capital. There is no limit on the value of a capital gift. However the value of the gift will be subject to IHT on a sliding scale until the donor has survived seven years from the date the gift is made.
The family house
The family home is often the most valuable asset held but it can also be the most difficult asset to plan for when it comes to trying to ensure it passes down to the children or next generation. Often families believe that gifting their property to loved ones will protect it but this is not necessarily the case. A gift of any asset must be unconditional and this requires that no benefit beyond a de-minimis is retained in the asset given away. If you give your whole house to your children but continue to occupy it this is a gift with reservation of benefit and is not exempt from IHT. Putting your property in a trust can mean that it becomes a protected asset.
In the right circumstances, trusts can play a very effective part in overall IHT planning. Some people choose to gift assets into a trust rather than directly to individuals as control of the gift is given to the trustees rather than to individuals.
A gift to a trust is a chargeable lifetime transfer and the value transferred must not exceed the value of the available nil rate band for IHT, currently £325,000, in order that no IHT arises on the value transferred. If this sort of strategy starts early enough then a transfer up to the nil rate band can be made every seven years into a trust. Anyone thinking of a trust needs to be aware of the tax position for the trustees and the beneficiaries upon receipt of a distribution.
From April 2015 if an individual dies before the age of 75 they can pass their contribution fund to anyone as a lump sum and there is no tax payable by the recipient or the deceased. If the individual dies after the age of 75 his nominated beneficiary will pay tax at his marginal rate of income tax. This can make leaving your pension to the next generation a very tax efficient way of passing on wealth.
There is no one size fits all solution to succession planning but as a starting point you should consider the following questions:
1. Have you got sufficient income to meet your own needs both now and for the long term?
2. Who will benefit from your estate on death including charities?
3. Do you have a pension that can be passed to the children?
4. Are there any assets that are not charged to IHT, such as business property relief (BPR) qualifying assets?
5. Can you afford to make lifetime gifts to individuals or charities?
6. Should some assets be protected and governed with trustees?
What is vital is to start planning as early as possible and constantly review the position as time passes and needs change.
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