In all likelihood, you will have worked hard to build up your current wealth. You may have taken risks, devoted long hours to creating a business or made sacrifices to establish your investment portfolio.
At all stages, you will probably have suffered considerable amounts of tax, be it income tax, corporation tax, capital gains tax or stamp duty land tax.
Published: July 23, 2018
In all likelihood, you will have worked hard to build up your current wealth. You may have taken risks, devoted long hours to creating a business or made sacrifices to establish your investment portfolio.
At all stages, you will probably have suffered considerable amounts of tax, be it income tax, corporation tax, capital gains tax or stamp duty land tax.
And then there is inheritance tax (IHT) potentially the final taxing cut.
Inheritance tax was introduced by the Inheritance Tax Act 1984, which came into effect in 1986 but which has its roots in Estate Duty, which was first introduced in 1894. While the majority of estates are too small to be subject to the tax, for those that are above the threshold, the average tax payable is significant – £181,000 per estate in 2014/15. In recent years, rising house prices and a frozen starting point (threshold) for IHT have sharply increased the current and projected tax take, as the chart below shows.
While IHT may be a major concern for you and your heirs, there is much more to estate planning than just reducing the Chancellor’s slice. Indeed, for some people IHT is a price that has to be paid to achieve their other financial goals. Either way, it is certainly worth thinking first about what you want to happen to your wealth once you are no longer around:
Answers to these questions will help shape your will and provide a structure for your IHT planning. They may also prompt you to consider whether making some lifetime gifts is a sensible option.
As a general rule, if you are of UK origin, if you live in the UK and consider it to be your permanent home, then you are regarded as having UK domicile and your entire estate, wherever it is situated, will be subject to UK IHT. On the other hand, if you do not regard the UK as your permanent home and HMRC accept that you have a non-UK domicile, then normally you will only be subject to UK IHT on assets which are situated in the UK. However, it is important to note that even if you are not legally domiciled in the UK for general purposes, you will nonetheless be deemed domiciled in the UK for tax purposes if you have lived here more than 15 out of the last 20 years. Space limitations mean that this guide only considers the UK domicile situation.
Although an IHT liability can arise during lifetime in some circumstances, in practice the vast bulk of the tax is raised at death. On death, IHT is payable at a flat rate of 40% on the amount by which your estate exceeds the nil rate band (frozen at £325,000 until April 2021). As illustrated by the graph, the amount of IHT payable increases dramatically as the size of the estate rises.
In practice, however, you may have made lifetime gifts the seven years prior to death that will use up some or all of the nil rate band – increasing the liability on your estate further still. Alternatively, there may be reliefs and exemptions to take into account that will effectively ‘exempt’ a greater part of your estate form IHT.
These reliefs will often allow family enterprises to pass free of IHT if the appropriate conditions are met: advice is therefore vital if you think they may be relevant.
Certain gifts made during your lifetime will be altogether exempt from IHT and so will fall out of your estate for IHT purposes as soon as they are made. Making lifetime gifts that qualify for an exemption, can be a simple, tax-efficient way of reducing the amount that will be subject to IHT on your death and it will therefore be important to take full advantage of these exemptions where possible:
While not a relief as such, the first part of the estate (currently £325,000) is charged to IHT at a nil rate, regardless of to whom it is left. In the case of a married couple or civil partners, if the nil rate band is not used on first death (perhaps, because the entire estate is left to the survivor), the unused amount can be claimed on second death under the transferable nil rate band rules. At current rates, this means that if each spouse’s will leaves everything to the survivor on first death, then on second death there are two nil rate bands (total £650,000) to cover the estate before tax becomes payable.
For deaths occurring on or after 6 April 2017, there is also an additional ‘residence nil rate band’ (RNRB). Unlike the standard nil rate band (which is available regardless of the size and composition of the estate), the RNRB is only available to an estate where an interest in a residential property, that is or has at some point during your period of ownership been your residence, is left to one or more of your direct descendants (or their spouses) on your death. Like the standard nil rate band, to the extent that the RNRB is not used on first death, it can be claimed by the estate of the surviving spouse/civil partner on second death.
In the 2017/18 tax year, the RNRB is £100,000 for an individual (so £200,000 per married couple) and this will increase to £125,000 per individual from 6 April 2018. Thereafter, the RNRB will increase gradually by £25,000 each tax year until 6 April 2020 when it will be fully phased in. Once it is in full force a couple with a qualifying residence worth £350,000 will be able to leave £1m between them free of IHT.
Note that the RNRB is restricted where the estate exceeds £2m.
Your will is a key part of your estate planning. It sets out what you want to happen after your death, dealing not only with passing on your wealth, but also with many other important aspects. In drawing up your will you need to consider:
The decisions you make in your will have legal force when they take effect upon your death. Thus a poorly drafted will can create great problems for your executors and beneficiaries. A DIY will form from the local stationers may look a cheap option, but the fact you are reading this guide suggests it will probably not be appropriate in your circumstances.
Your will needs to be reviewed regularly, like any other aspect of financial planning. Your wishes may change, your circumstances may alter or there may be tax changes which need to be taken into account. If you marry, your will is usually revoked whereas, if you divorce, your will remains valid, but with your ex-spouse/partner treated as pre-deceasing you. In theory wills can be re-written by the adult beneficiaries after your death via a deed of variation, but relying upon this route to correct errors is not to be recommended. Unsurprisingly, beneficiaries may not be willing to reduce their entitlements, even if it could mean tax-savings for others
If you die without a will, the rules of intestacy determine how your estate will be distributed. These default rules vary depending upon in which part of the UK you are domiciled: England and Wales share the same rules, Northern Ireland’s are very similar, but Scotland has a markedly different approach. To compound matters, the rules do change from time to time – indeed, major revisions have recently been made in England and Wales.
Like many other default systems, intestacy rules are a compromise. They are unlikely to replicate what you would put in your will and could create an unnecessary IHT bill. As with wills, a deed of variation could offer an escape, but if there are minor children involved any changes would need the consent of the Courts, which may not be forthcoming.
A will deals with matters at the end of your life, but what if you are unable to handle your affairs before then as a result of mental or physical illness? One way to address this question is to set up a lasting power of attorney (LPA). Under an LPA you can appoint one or more people to act on your behalf if you become unable to make decisions or act yourself.
There are two different types of LPA:
Creating and registering an LPA while you are fit and healthy will ensure that complications, costs and delays are avoided should you later lose capacity. The LPA also enables you to choose who will act on your behalf in that event – instead of this being determined by the court – and provides you with the opportunity to set out any instructions and preferences that may be important to you.
In theory it is very simple: to avoid any inheritance tax you need to ensure that you have taken the appropriate steps so that on death your estate (including any non-exempt gifts made in the past seven years) is less than the available nil rate band including, where appropriate, the residence nil rate band. In reality, however, it is not always quite that straightforward:
This guide is provided strictly for your general consideration only. It is not intended to (and does not) represent advice. It is essential that no action is taken or refrained from being taken based on this guide alone. Specialist advice (as referred to throughout the guide) is essential. Accordingly neither CBF Wealth Management nor any of CBF Wealth Management officers, employees or contractors can accept any responsibility for any loss occasioned as a result of any such action or inaction.
The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax and trust advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances.
So what now…
CBF Wealth Management provides financial planning advice for individuals which includes taking into account any tax planning opportunities that may be applicable to your individual goals. If you require specific advice on tax liabilities and treatments, then you should speak to a tax professional.
In this guide we have given you a broad outline of IHT and estate planning. There are many complexities and pitfalls which we have – for now – ignored. If, having absorbed the guide’s contents, you want to develop your own estate plan, your next step is to talk to a CBF Wealth Management financial planner. We can take you on the journey from the very general in this guide to the very specific which addresses your personal goals and individual circumstances. It can be a long journey, but your beneficiaries will ultimately be thankful that you took it.
For further information or to book a consultation with a CBF Wealth Management financial planner, please call 0207 874 1190 or 0207 874 1194.
CBF Wealth Management Limited (Registered number: 10229399) is registered in England and Wales and is an Appointed Representative of Close Asset Management Limited, trading as Close Brothers Asset Management. Close Brothers Asset Management is a trading name of Close Asset Management Limited (Registered number: 01644127) and Close Asset Management (UK) Limited (Registered number: 02998803), both of which are registered in England and Wales and are authorised and regulated by the Financial Conduct Authority.
All companies hold their registered office at 10 Crown Place, London EC2A 4FT.
CBF Wealth Management Limited is a related business of HW Fisher & Company. CBAM5254. July 2018.
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