You have worked hard all your life, built up substantial assets, and simply want to pass these down to your children and grandchildren to give them a helping hand in life once you have gone. It is a common goal we hear when speaking with clients.
However, as with many things in life, it is not that simple. In particular, HMRC would like to be a major beneficiary of your estate as well. During the 2019/2020 Tax Year, £5.2 billion in Inheritance Tax (IHT) receipts were received by HMRC.
Despite this eye-watering figure, you may be surprised to know that IHT receipts during 2019/2020 decreased for the first time in the decade. This is mainly because of the effects of the Residence Nil Rate Band (RNRB), the new allowance initially introduced in 2017-18.
With RNRB now worth £175,000 per person, it really does pay to ensure that your descendants can use this allowance. It relates solely to your property and you need to check the wording of your Will to ensure it accommodates this new allowance. There are stipulations that mean only a direct descendant can benefit from the allowance, so Discretionary Trusts, for example, would invalidate this.
This is particularly important as previously it has been good practice to include a Discretionary Trust when drafting a Will.
Trust planning is still an excellent method of passing on wealth. This can be used for the remaining assets in your Will and ensures that the taxman does not benefit from the second generation as well as your own.
In addition, you can gift excess cash away during your lifetime to Trust provisions, which fall out of your estate after 7 years. You can have several of these arrangements with a full £325,000 tax-free allowance per Trust available.
Gifting during your lifetime directly to those you care for is another option, allowing you to see first-hand the impact your wealth can bring. You can give away £3,000 worth of gifts each tax year, without them being added to the value of your estate. This is known as your ‘annual exemption’ and can carry any unused annual exemption forward to the next year – but only for one year.
Each tax year, you can also give away wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child) and as many small gifts of £250 to whoever you choose. A word of warning though – once gifted you lose all the protections over how this is spent, unlike in a Trust.
Anything you leave to charity is also free of Inheritance Tax, so can be a useful way of reducing your Inheritance Tax bill whilst benefitting good causes. Should you leave at least 10% of your estate to charity, it will cut the Inheritance Tax is due on the rest of your estate from 40% to 36%.
Finally, there are IHT tax efficient investments available, utilising Government-led initiatives such as Business Property Relief (BPR). These investments can be passed on free from inheritance tax upon the death of the investor, provided the shares have been owned for at least two years at that time.
BPR is a well-established relief dating back 40 years, encompassing assets such as shares in unquoted qualifying companies and shares in Alternative Investment Market (AIM) listed companies. These can provide a simple way of achieving investment growth whilst removing tax liabilities for your beneficiaries.
The team at Foresight are experts in assessing your Will and current financial position to ensure that set your estate up in the most efficient way. Please contact us and one of our Wealth Strategists will be pleased to run through your options with you.