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Six Ways to Transfer Wealth

It’s been easy to look at the news headlines over the past two or three years and assume that the economy has been a universal picture of doom and gloom. However, that’s not necessarily the case – many businesses have continued to do well and many people have prospered.

In fact for some people it hasn’t been a question of making ends meet; the problem has been disposing of wealth – making sure their estates are not hit too hard by Inheritance Tax (IHT) and making sure that their wealth is passed on to future generations.

If you’re in that happy position, what steps should you take to make sure your wealth is transferred to the people you want to transfer it to? Like so many areas of financial planning, this is an area where some basic preparatory work can go a long way. We’ve outlined some simple steps below that everyone should take.

Make A Will. Making a will is relatively straightforward and inexpensive, and there’s really no excuse for not doing it. You may think you don’t need to do anything as you want all your assets to pass to your spouse but that won’t necessarily be the case. If you die intestate (that is, without making a will) then other family members may well benefit from your estate whether you want them to or not. So make a will – and make sure you keep it up to date.

Start to give money away. Many people still don’t know that they can make gifts out of regular income. This can be an excellent method of passing wealth on to the next generation and providing the gifts pass three key tests they will not incur an IHT liability. The gifts must be made out of income (as opposed to selling assets to fund them); they must be made on a regular basis and they must not reduce the donor’s standard of living.

Make your gifts sooner rather than later. Any gift given more than seven years before the death of the donor is free of IHT – a good example of the need to plan early. Remember though, that the ‘gift with reservation’ rules apply: if you are giving something away you cannot continue to enjoy the benefit of it. For example, you cannot give your house to your children and continue living in it.

But some gifts are more equal than others… Certain gifts are treated differently, and in this case the ‘seven year rule’ doesn’t apply. Both parents can give up to £5,000 to their children when they marry, and annual gifts of up to £3,000 can also be given. If you cannot give large sums of money then it makes sense to make use of these smaller gift allowances.

Make Use of Trusts. Many people believe that trusts are highly complicated and are only to be used for multi-million pound estates. Far from it. They can be simple and relatively inexpensive, yet still allow you to transfer wealth out of your estate and save IHT into the bargain. Yes, you’ll need specialist advice but the potential savings in tax will almost certainly cover the cost of that advice many times over.

Flee the Country. We are perhaps moving into more extreme areas with this last suggestion, but if you are permanently resident abroad and intend to remain so then it may be that your country of domicile has changed. This could well impact favourably on the IHT calculation regarding your estate. As with trusts, this is an area where specialist advice is very much required but once again the savings can be significant.

As we stated above, transferring wealth to your intended beneficiaries requires careful planning, but if that planning is done properly then the savings made in Inheritance Tax can be substantial.

Specialist help is needed in many areas and we are always happy to prepare and give advice clients in what can be a very complicated area. However with the right advice there’s no reason why you can’t transfer the wealth you want to transfer – while continuing to enjoy the life you deserve.

building your financial future


Sources: http://www.moneyplusblog.co.uk/wp- content/uploads/2012/11/ihts100112.pdf

Inheritance Tax – The Forgotten Battleground

Not so long ago Tory promises of an increased nil rate band prompted the then Chancellor, Alistair Darling, to introduce new legislation to effectively double the nil rate band for married couples and those in civil partnerships. Inheritance Tax was an important battleground but, as house price growth went into reverse and stock markets fell, it became less of a vote winner.

With a coalition government, compromise is necessary from the outset and inevitably both sides have to sacrifice manifesto pledges. The good news is that the Liberal Democrat Mansion Tax has not survived; the bad news is that neither has the promised £1million nil rate band. In fact, the nil rate band remains frozen for the next 4 years at £325,000. This means more and more estates will fall back into the Inheritance Tax trap. A £650,000 estate increasing in value by 3% per year (probably less than the rate of inflation) will mean the tax bill faced by beneficiaries will increase by approximatley £150 per week over the next 4 years.

So what can be done?

A few years ago including a trust provision within the Wills of married couples was standard practice since it allowed both spouses to utilise their nil rate bands without jeopardizing the security of the survivor. The introduction of the transferable nil rate band effectively rendered such tax planning redundant but, with a static nil rate band, such planning again has appeal. If assets are hived off to a trust on the first death, any future growth falls outside of the estate of the surviving spouse. By contrast, assets passed directly to the surviving spouse effectively means the survivor inherits an extra Nil Rate Band. If the value of the estate increases by 3% a year and the nil rate band stays static, the trust saves £22,000 in tax over 4 years. Of course, the Inheritance Tax position needs to be balanced against possible increases in income and capital gains tax but these taxes too can be mitigated with good advice.

Having reviewed your Wills to ensure maximum tax efficiency, it is then time to look at further planning which can be undertaken now.

Lifetime planning falls neatly into three strategies: reduce; convert; insure.

Gifts can reduce the value of an estate but of course, tax savings should not be made at the expense of your financial security. Although there are exemptions, large gifts need to be survived by 7 years.

By contrast buying assets which qualify for Business Property Relief or Agricultural Property Relief delivers tax savings after just 2 years but the tax advantages need to be weighed against the investment risks.

If neither of these strategies is practical, the final option is to insure against the liability. This is not a solution but it does at least mean that your beneficiaries have the means to pay the tax bill.

Inheritance Tax is a complex area and one size certainly does not fit all, please take professional advice.

The NO Wedding Planner

Recent figures show a significant decrease in the marriage rate. From a peak in 1940 when, spurred on by an impending war, 426,1000 young couples married, in total just 228,204 marriages took place during 2008 in England and Wales.

The falling marriage rate is partly attributable to a rise in the number of people choosing to remain single but is mostly down to the fact that more and more couples are choosing not to marry and this has ramifications for their financial planning.

Let us consider the example of Paul and Sarah. They own a property valued at £600,000. The property is owned 60% by Paul and 40% by Sarah, reflecting their differing initial deposits. They have an outstanding mortgage of £100,000. The mortgage is covered by a life assurance policy which will pay out on the first death. They also have a joint savings account with a balance of £50,000. They have wills which leave assets to each other on the first death.

Sadly Paul suffers a fatal heart attack. His estate is valued as follows:

Property £300,000 (60% share less mortgage)
Life assurance benefit £100,000
Savings Account £25,000
Total £425,000

Assets passing between UK domiciled spouses are exempt from Inheritance Tax but the same exemption is not afforded to cohabiting couples and therefore the value of the estate above the nil rate band (currently £325,000) will attract Inheritance Tax at 40%. This means Sarah will need to settle a tax bill of £40,000 before probate can be granted.

The tax bill could have been easily avoided simply by writing the life assurance policy in trust so that it did not form part of Paul’s taxable estate. This would also mean that the proceeds would be available immediately without the need to wait for probate to be granted which can take many months.

The position could have been considerably worse had Paul and Sarah not written Wills. Under the laws of intestacy, where there are no children, cohabiting partners do not receive anything and Sarah could have found herself co-owning the house with Paul’s parents.

David Anderson is a Chartered Financial Planner with Concept Financial Planning

Concept Financial Planning Website