Inheritances can provide a real springboard for future generations. They can give much-needed capital to buy property, start businesses, or just assist in improving day to day living.
However, it requires specific strategies to be in place to maximise and maintain these funds through the generations. This article looks at the way parents can ensure the maximum possible is left behind, as well as how the recipients can invest or utilise policies to allow for the longevity of this provision.
Parents – Some strategies to provide the maximum inheritance for the children are as follows:
- Wills – let’s start with the simple strategies. Having no Will, or one that is out of date means that you are not going to be able to take advantage of many of the other strategies here. A cheap Will can be worse than no Will, so get one that is reassuringly expensive – to coin a phrase. It will be money well spent.
- Lasting Powers of Attorney – these enable your affairs to be looked after in the event of incapacity. There are 2 types – one for Property and Finances, one for Health and Welfare. Both are recommended and The Office of the Public Guardian has made it easier than ever to complete everything online.
- Trusts – have been around for literally centuries and are still a fantastic tool for moving funds outside an estate on death. However, HMRC has been chipping away at their effectiveness – there is now a Periodic Charge of 6% of assets over the Nil Rate Band every 10 years. And a charge of 20% for assets given away during lifetime over the Nil Rate Band every 7 years. But it’s still better than 40% Inheritance Tax (IHT).
- Pensions – After the Pension Freedom rules came in 2016, pensions suddenly became excellent IHT planning tools. By utilising a Trust as the beneficiary, the money falls outside your estate and bypasses your heir’s estates.
- Gifts Out of Normal Income – most people understand Gifting, where you can give capital which then takes 7 years to fall outside the estate. But Gifts Out of Normal Income are even better. You can give money from your income and it falls outside your estate immediately. However, you have to be able to prove that it has not affected your standard of living – and we suggest filling in HMRC Form IHT403 on a regular basis to prove the expenditure.
- Whole of Life plan – A life insurance policy that pays out in the event of your death. These plans are usually set up on a joint life second death basis – so only payout on the 2nd death and are set up for life. The sum assured is usually set up to the level of IHT to be paid, as there needs to be insurable interest – in other words, the insurance company does not want people to over-insure. The premiums are considered to be a Gift Out of Normal Income, so fall outside the estate immediately, and policies are always placed in Trust, so the benefits are paid to the beneficiaries free of Inheritance Tax. Although the premiums are an expense, the main comment with these plans is that they look too good to be true. But you have to be certain that you can maintain the premiums, otherwise, the plans lapse with no value.
- Discounted Gift Trusts and Gift and Loan Trusts – Great for those who want an IHT saving but need access to some of the capital. The money is usually invested in a bond, which then gives you a discount on your IHT liability from Day 1, whilst giving you a series of pre-set capital payments.
- Enterprise Investment Schemes – a UK government scheme that helps younger, higher-risk businesses raise finance by offering investors generous tax reliefs to investors. Such investments qualify for Business Property Relief and so can be passed on free from inheritance tax, provided the shares have been owned for at least two years at that time. This means that your capital can grow, and it can all be retained by those inherited. However, this type of plan should only be considered by more experienced investors – with expert advice.
Inheritors – If you have just received an inheritance, then what strategies can you implement to maximise that inheritance:
- Pensions – Potentially a great start when it comes to investing part of an inheritance. You can obtain tax relief at your highest marginal rate and funds grow free of tax within the pension wrapper. However, you cannot access it until age 55, but it does ensure that you get tax-free compounded growth.
- ISA allowances also allow for tax-efficient growth. You can make £20,000 contributions every tax year and can invest in a wide range of funds. These funds can be accessed at any time if you require the capital.
- Investment Bonds – enable investments to be made in a wide range of funds. You are able to take 5% per annum from the investment free of tax, although taking this payment will reduce the amount that you have left.
- Investment portfolios – there are a very wide range of investments, ranging from Corporate Bonds to equities and even AIM (Alternative Investment Market) investments. An investment into these will provide the opportunity for growth above bank interest rates over time.
Whether you are looking to implement strategies to maximise the value of what you leave behind, or if you have just received an inheritance, there are a wide range of strategies that you can use.
We have mentioned a number of them here today but, as you will probably have realised, this is only the starting point for Estate Planning. It is a very complex subject and one that needs expert advice.
At Foresight, we are experts and, as award-winning Independent Chartered Financial Planners, are ideally placed to look at the whole financial picture with you. If you would like to discuss this or have any questions that you need answering as a result of this article, then please contact Foresight and we will be happy to discuss your options.