“Flexibility with the planning is also key, especially with IHT, which might be planning for the very long-term. Make sure that the basics are in place, such as wills.”
Gifting
A good place to start, after the individual has allocated money to spend on hobbies and leisure pursuits, is with gifts.
Individuals can take advantage of the annual exemptions and small gifts allowance as one can gift £3,000 each tax year, and any unused annual exemption can be carried 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).
- Normal gifts out of income for example, Christmas or birthday presents. You must be able to maintain your standard of living after making the gift.
- Payments to help with another person’s living costs, such as an elderly relative or a child under 18.
- Gifts to charities and political parties.
- With small gifts, you can give as many gifts of up to £250 per person you want during the tax year as long as you have not used another exemption on the same person.
Other gifts can be made over and above the annual exemption, such as contributing to a child’s or grandchild’s Junior Isa or pension, gifts outright or gifts into trust.
Personal gifts are subject to the seven year rule, which means surviving for seven years after the gift was made.
If you die within seven years and give away more than your available NRB (£325,000) then the person that has received the gift is liable for the IHT.
For example, on a gift of £425,000, £100,000 of that amount will be liable for IHT, although the tax reduces if the individual dies between year three and seven – a process that is called tapered relief.
Where an individual receives a substantial gift, it may be possible to arrange a life insurance policy for the period the liability is due, or even just to insure against the potential loss of NRB if a gift is not taxable (for example if it is £325,000 or less) to make sure there is no additional tax paid versus if the gift was never made.
So a whole-of-life insurance policy can be set up to cover the tax due where the estate will have to pay IHT when the individual dies, meaning that more is passed to beneficiaries.
To make sure the proceeds of the life insurance policy are not included in the estate, the policy needs to be written into trust.
Trusts
Barefoot says: “Complexities arise in the use of trusts. It’s a gift, so it’s crucial to establish: the extent that someone wishes to elect for beneficiaries to change in future; if they wish to set-up rules on access of the trust; and to what extent they wish to retain access to the funds in the trust.
“There are an array of options available within this area. Loan trusts can be one way to halt the worsening of the tax problem in a simple manner, since all capital growth would be outside of the estate.”
