Inheritance Tax planning and wealth preservation 

How will your wealth benefit the next generation?

Inheritance Tax has consistently been one of the least popular means by which the Treasury swells its coffers. And rising property values over the past decade mean that now even those who consider themselves only moderately wealthy can find themselves in the Chancellor’s sights. Fortunately proper planning can legitimately mitigate the effects of this tax.

Inheritance Tax – which is paid by the estate rather than the beneficiary of a particular bequest – is currently charged at a rate of 40 per cent of the value of your estate above the nil-rate threshold. The 2015/16 rate is £325,000 for an individual. Because assets inherited by married couples are exempt from inheritance tax, the nil-rate band is in most cases passed on to the surviving spouse or civil partner. This means that, in effect, a qualifying couple’s estate up to £650,000 is exempt from inheritance tax.

Inheritance Tax – like income tax rather than stamp duty – is only incurred on sums above the nil rate band. A single person’s estate valued at £425,000 would, therefore, attract inheritance tax of £40,000, because tax is only charged on the £100,000 in excess of the threshold.

It is possible to minimise your exposure to Inheritance Tax in a number of ways. These include lifetime transfers of assets which are in a limited number of cases exempt from taxation. Otherwise, if made more than seven years before your death, such gifts will be taxed at a rate of 20 per cent. Lifetime transfers made within seven years of your death are added back into the estate for the purposes of calculating the tax payable, with the tax reduced on a sliding scale dependent on how long you survive following the gift.

Leaving at least ten per cent of your estate to charity, meanwhile, reduces the rate of Inheritance Tax payable by your estate to 36 per cent.

If you own or have an interest in a business, or hold shares in an unquoted business or one quoted on the Alternative Investment market (AIM), these will be exempted from inheritance tax under Business Property Relief. The same is true of controlling shareholdings in businesses with a full listing on a recognised Stock Exchange. Land, buildings, plant and machinery can also, in some circumstances, qualify for Business Property Relief. Selling a business could, by the same token, create a potential IHT liability.

Investments held within the Government’s Enterprise Investment Scheme for more than two years are also exempt from inheritance tax. This exemption, though, is granted in recognition of the scheme’s inherently risky nature so it should only be entered into following detailed advice.

Putting your assets into a family trust is the main way in which Inheritance Tax can legitimately be minimised. Family trusts are usually no longer able to shelter your estate from inheritance tax completely but they can reduce it.

Such trusts come in a variety of forms and good legal, tax and financial advice are essential to ensure that you choose the correct structure for your circumstances.

Clarion Wealth Planning Limited can also advise you on the most efficient ways to take your pension benefits to, where possible, maximise the amount that can be passed on to your spouse or heirs and minimise the tax charges that may be payable by them.

Finally, it is worth noting that Inheritance Tax is paid on the value of your assets as assessed during the probate period but that refunds are available if a subsequent sale proves this valuation to have been optimistic. If your heirs go on to sell any assets for a lower figure than the probate valuation they should seek advice to determine whether a refund of the overpaid inheritance tax may be available.

To find out more about how Clarion Wealth Planning’s financial planners and network of expert professional contacts can help develop the right estate plan for you please call our expert team on 01565 653804 or send us an email.

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From providing for those who cannot manage their own affairs to minimising inheritance tax and controlling who benefits from an estate, trusts are established for many reasons. All, however, require proper management.