When it comes to Inheritance Tax planning, an individual’s life can effectively be divided into four stages, each with different goals and needs. At each of these stages, very different forms of Inheritance Tax planning will be appropriate.
However, the different stages of a person’s life can dictate the type of planning that is possibly most relevant. The “four ages” of Inheritance Tax planning could therefore be as follows:
The first age is that of a young professional with a young family, a house, mortgage and no doubt high living expenses. At this stage, the individual’s main considerations are likely to be paying off their mortgage, planning for school and university fees and saving for retirement. Here the Inheritance Tax planning – to the extent such people have a concern about a potential liability that is many years off – is likely to consist of two elements. The first is perhaps putting in place what is known generically as an Inheritance Tax Protection policy, written in trust for beneficiaries other than the surviving spouse. This will provide a tax free sum to help the beneficiaries meet the eventual Inheritance Tax liability. The monthly/annual premiums are likely to be relatively modest. The second, having a tax effective and flexible Will which allows for the use of the tax free threshold for Inheritance Tax purposes (currently £300,000) on the death of the first spouse, is also essential. This would be a relatively inexpensive and simple response to a potential Inheritance Tax problem. This in turn would require attention to be given to the way in which the estates of husband and wife are held between them.
The second age is that of a middle aged high net worth individual, possibly with children and grandchildren, or a successful entrepreneur considering retirement. At this stage the main priorities are reducing the value of the estate whilst keeping sufficient capital and income to fund an appropriate standard of living. Succession planning for a business is also crucial whilst preserving any Inheritance Tax Business Property Relief (“BPR”) which is available.
Here many of these aims can be met through the use of a lifetime discretionary trust, which can be an effective and flexible form of tax planning. Placing the assets such as private company shares into a discretionary trust allows, perhaps most importantly, the settlor to maintain control of the assets that are being gifted by being a trustee of the trust. It would also allow the entrepreneur to “lock in” the business property relief available on the transfer of company shares and give them the ability to perhaps drip feed shares to beneficiaries who work for the company, providing an incentive to those who will be taking the company forward in the future.
There are also many ideas involving the family home which enable the potential taxpayer to remain living in the property while removing a large proportion of the value of the property from their taxable estate. These ideas are too numerous to expand upon here but each situation needs to be assessed in order to advise on the best planning to be used.
Consideration could also be given to investing surplus funds in assets which qualify for BPR, commonly known as relievable assets, which are exempt from Inheritance Tax after two years ownership, subject to meeting various asset dependant conditions.
The third age is often referred to as deathbed planning. This is where the individual may not have long to live and no tax planning has been put in place so most common forms of planning are inappropriate. Here again investment in relievable assets may be appropriate to achieve Inheritance Tax exemption as mentioned above.
A tax effective and flexible Will remains vital.
The final age – and this may surprise some – is post-death planning. The tax planning idea here is a Deed of Variation, which can be used if the deceased’s Will was not as tax effective nor flexible as it could have been or the person died intestate. It can be used to make sure that the available tax free threshold can still be utilised.
The effect of the deed is to allow the estate to be distributed tax effectively with the new gifts being treated for Inheritance Tax purposes as if they were made by the deceased in their Will. The deed must be put in place within two years of death and be agreed to by the beneficiaries affected. This can be a good way of diverting wealth to children where beneficiaries are already wealthy in their own right and do not want to exacerbate their own potential future Inheritance Tax problem.
It is therefore very important that clients, whatever their age and circumstances, at least consider their position and take advice on the options available to them.
For more information, please contact Peter Legg or complete the online form below.