Expert financial advice By Andy Oliver, CEO of Private Client Consultancy
UK Inheritance Tax and Estate Planning: What You Need to Know
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n a recent report by the Organisation for Economic Cooperation and Development, a call was made to increase UK inheritance tax (IHT). The government is looking for ways to pay off debts that were catalysed by the pandemic, and policymakers are targeting IHT as a way of doing this. Some believe that increasing the tax on inheritance is a fair way of funding government programmes. Others argue that it should not be so high because it is money that has been previously taxed. Whatever your beliefs are, it is imperative that you be prepared for these changes. It is advisable to develop an effective strategy well in advance. Private Client Consultancy can help you feel confident about your plan. Because property prices are continuing to rise, more people are being pushed over the IHT threshold of £325,000. When a property is involved, the threshold rises to £500,000. Evidently, UK IHT is complex, and it is made even more difficult for expatriates. While Portugal does not have IHT, British nationals will still typically be subject to the UK’s inheritance laws. This is even if they are a resident of Portugal and none of their assets are in the UK. The following is vital information regarding IHT that you may want to consider when planning your estate. Make a will Making a will is one of the first steps in planning your estate. Quite frankly, it is also the most important. Of course, no one wants to think about this. There are many emotions that arise when one begins this kind of planning, but the benefits are endless. Often when there is no plan in place, loved ones are left with hefty IHT bills at a time when they should be allowed to process their grief. Where the estate value is high, IHT must always be paid. However, if a will is made in advance (and regularly updated), the amount of tax will be greatly reduced. To ensure that your possessions, property, and money are allocated properly, it is essential to seek out professional help when drawing up a will. This is especially true when there is a business and/or overseas property involved. Business relief will allow for some assets to be passed on either tax-free or with a reduction on the bill. Additionally, expats
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pay a reduced tax rate if more than 10% of their net worth is left to charity. If your main residence is in the UK, then you are liable for the IHT on foreign assets. However, if you live permanently abroad, then there may be exemptions depending on where you are domiciled (though these exemptions are very rare as it is incredibly difficult to lose your domicile). This is a complicated area of the law and can be discussed in further detail with one of our advisers. What you want to avoid is being taxed twice. If you don’t manage your estate carefully by having an expert help you understand the laws of the countries you hold residencies in, then you may risk being taxed twice. Establish a trust There are many benefits to creating a trust. For one, they protect your wealth by helping provide managed funds to your beneficiaries. They also allow for shares and equity to be passed on in an efficient manner. Assets that have been placed in a trust are not exempt from the law. This is a common misconception that has landed many people in troubled waters. However, they do reduce IHT if created properly. Because the laws around trusts are intricate, you may end up paying more IHT than necessary. Therefore, speaking with a professional is necessary because they can help you avoid this. Set up a life insurance policy It is possible to use a life insurance policy to help beneficiaries cover any IHT liability. If your beneficiaries are paid a regular income or lump sum from your life insurance and the money takes your estate above the IHT threshold, then whatever is above the threshold is liable to 40% tax. However, if your life insurance is paid to your spouse or a charity, then IHT is usually not charged. This is true even when the amount surpasses the IHT threshold. Whether or not IHT will need to be paid depends on your estate’s value. However, if you write your life insurance policy into a trust, the lump sum that is paid out in the event of your death is not included in your legal estate. Therefore, by giving up ownership of your assets, all management responsibilities go to the trustees and the estate will no longer be subject to IHT. Know your rights Finally, it is crucial that you know your
options—all of them. There are so many aspects of the bureaucratic processes imparted upon us that are purposely made to be painstaking. Knowledge of what choices you have provides you with financial freedom, and that is invaluable. Later in life, whether it is due to empty nesting, for the stamp duty holiday, or because of ageing, many people decide to sell their expensive properties or go into care homes. Often, they don’t realise that this allows them to qualify for a little-known tax credit called the ‘downsizing addition’. The amount one receives for the downsizing addition is typically the same as the residence nil rate band that is lost when the prior home is no longer included in the estate. Many have no idea that the downsizing addition even exists, and this is partly to do with the fact that the rules around it are very complicated. If this family home allowance is not claimed by the descendants after a death, the family will incur a large death tax bill. Claiming the downsizing addition often allows for the tax bill to be cut entirely. Therefore, missing out on this tax credit can cost families as much as six-figure sums. Additionally, you may want to consider an equity release scheme. Lifetime mortgages and home reversion schemes allow you to keep living in your family home all while releasing money and reducing IHT. Once the equity has been released from your house, it can be gifted to your descendants. There will be no IHT to be paid on it if this is done at least seven years prior to your death. Before making any significant decisions about what will happen to your estate when you are gone, speak to one of our Wealth Managers to ensure your plan is perfectly tailored to your needs. As I mentioned before, the legalities around IHT and estate planning are often so convoluted that people leave it until the last minute. Of course, doing this will allow for various problems to arise that could have been avoided. Consulting with an adviser about your estate will provide relief and ultimately save you so much time and energy. You have already done the hard work. We are here to simply help you make the most of what your hard work has afforded you and your family. If you would like to discuss your plan with a qualified adviser, please get in touch with us at info@pccwealth.com
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