Case Studies
We will be adding different case studies throughout the year, but to start 2008 we have set out some examples of possible ways to plan to reduce your estate’s possible Inheritance Tax burden:
Inheritance Tax Case Studies:
You have worked hard all of your life and you have a nice home and you have built up a reasonable “nest egg” for your retirement. You will probably be unhappy to learn that unless you take steps to prevent it, Her Majesty’s Revenue and Customs could be one of the main beneficiaries of your estate if it is over the nil rate band on death (for 2007/2008 this is £300,000). If your estate is above the Inheritance Tax nil rate band, tax will be payable at 40% on the balance above the nil rate band at your death unless you leave it to an exempt beneficiary such as your surviving spouse, civil partner or a charity.
The steady improvement in standards of living together with increases in house values have resulted in more and more people leaving an Inheritance Tax (IHT) bill for their children. An obvious way for you to reduce your IHT liabilities is to reduce the value of your taxable estate by making gifts during your lifetime. No IHT is charged on lifetime gifts made outright to individuals or to trusts for the absolute benefit of one or more individuals, provided such gifts are made more than seven years before death. Such gifts are known as potentially exempt transfers (PETs). Each individual can gift £3,000 each financial year without having to survive seven years as an annual exemption and other allowances can be made, for example wedding gifts.
However, it is not always appropriate or desirable for outright lifetime gifts to be made. Flexibility and an element of continued control over the ultimate distribution of capital will often be an important issue.
For example, you may wish to give up all access to the capital and income (eg. a Flexible Gift Trust), or you may need additional income from the funds in retirement and may wish to retain access to the capital (eg. a Loan Trust). You may wish to give up access to the capital, but once again retain an access to the “income”. As a result of the lack of access to the capital, there is the possibility of an IHT saving from day one (eg. a Discounted Gift Trust).
Kellands Chetwood Ltd have set out an example of three different types of Trust that can help you to mitigate your estate’s liability to IHT, but none of the details should be used as recommendations as our consultants have been trained to undertake an in depth analysis of your personal situation before we can recommend any Estate Planning to you. These case studies are generic examples and are not tailored to your individual circumstances.
Please click on the links below to see working examples of IHT planning.
Flexible Gift Trust
Loan Trust
Discounted Gift Trust
Please note:
- Some IHT will be payable on creation of the trust if the amount that you gift is in excess of your available nil rate band and additional IHT may be payable in the event of your death within seven years.
- IHT charges may arise on ten-yearly anniversaries and/or where capital distributions are made from the Trust.
- The value of the Trust will go up and down and the value of the Trust fund at any time may be less than what you invested.
- Future changes to IHT legislation may impact on the effectiveness of IHT planning with the Trusts.
- The IHT nil rate band may not continue to increase or keep pace with investment performance which may lead to inheritance tax periodic and exit charges in the future even though there was no inheritance charge on the making of the gift.
(The information given in this case study is based on our understanding of UK law and HMRC practice at the time of printing. We accept no liability for the accuracy of the information provided. Legislation regarding taxation and HMRC practice may be subject to change, which cannot be foreseen. Kellands Chetwood Ltd offers the case studies as examples only and strongly recommends that you speak to one of our experienced advisers before these matters are taken any further.)
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Kellands Chetwood Ltd is authorised and is regulated by the Financial Services Authority. FSA Firm reference number 195024. http://www.fsa.gov.uk/register Registered in England | Company No. 4021559 |
