Tax-free allowances and their exceptions
Certain allowances are exempt from the seven-year rule. You can give up to £3,000 each tax year without it being considered part of your estate later. However, this allowance hasn’t changed for over four decades, and inflation has significantly diminished its value.
The annual allowance can be divided among several people or given to one individual, and unused allowance can be carried forward by one tax year. You can also give a tax-free gift £5,000 to a child or stepchild for their wedding or registered civil partnership. For a grandchild or great-grandchild, it’s £2,500, and £1,000 for any other person.
Regular gifts from excess income
Regular gifts from your surplus income are exempt from tax, provided they don’t impact your standard of living. These gifts must come from your regular income rather than the sale proceeds of a property. They might include payments into a child’s savings account or to cover your child’s rent. HMRC closely monitors this relief, so it’s important to maintain detailed records of the amounts given.
Maximising your pension benefits
Pensions are one of the most tax-efficient benefits in life and after death. They usually don’t form part of your estate for IHT purposes, though this doesn’t apply to money already drawn from a retirement pot. However, there may be Income Tax to pay depending on when the donor dies and how the benefits are taken.
If you die after age 75, your beneficiaries will pay Income Tax on money taken out of the pension at their usual rate. Beneficiaries can potentially reduce Income Tax on inherited pensions by withdrawing money gradually, and this also depends on their overall level of income
Role of trusts in planning
Trusts are versatile tools that play a significant role in estate planning. Individuals often opt to transfer gifts through trusts, which allows them to control the timing and purpose of the money’s accessibility. This method ensures that the beneficiary can only access the funds under specific conditions, at a predetermined time, or at the trustee’s discretion.
Moreover, life insurance policies can be integrated into an appropriate trust. This strategy ensures immediate access to funds for settling an IHT bill. Establishing a trust for your life insurance policy can provide a quick solution to potential IHT duties, preventing delays in the disbursement of the estate.
Power of Attorney is an essential tool in estate planning
Having a Power of Attorney in place is another crucial element of IHT planning and may require Court of Protection approval. It allows you to appoint someone you trust to make decisions on your behalf if you cannot do so. Knowing that your wishes will be respected even if you cannot express them personally can provide peace of mind.
Deprivation of assets and avoiding potential pitfalls
The term ‘deprivation of assets’ refers to deliberately disposing of property, assets or income to avoid care fees. If a local authority believes you’ve intentionally given away assets to evade these fees, they can charge you as if those assets were still part of your estate. Unlike the seven-year rule for gifts and IHT, there’s no time limit here – a local authority can investigate the disposal of assets going back decades.
Source data:
[1] https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/inheritance-tax/
THIS ARTICLE DOES NOT CONSTITUTE TAX OR LEGAL ADVICE AND SHOULD NOT BE RELIED UPON AS SUCH. TAX TREATMENT DEPENDS ON THE INDIVIDUAL CIRCUMSTANCES OF EACH CLIENT AND MAY BE SUBJECT TO CHANGE IN THE FUTURE. FOR GUIDANCE, SEEK PROFESSIONAL ADVICE.
THE FINANCIAL CONDUCT AUTHORITY DOESN’T REGULATE TRUST PLANNING AND MOST FORMS OF INHERITANCE TAX (IHT) PLANNING. SOME IHT PLANNING SOLUTIONS PUT YOUR MONEY AT RISK, AND YOU MAY GET BACK LESS THAN YOU INVESTED. IHT THRESHOLDS DEPEND ON INDIVIDUAL CIRCUMSTANCES AND THE LAW. TAX AND IHT RULES MAY CHANGE IN THE FUTURE.
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