Securing more of your wealth for your loved ones

Protecting your estate is ultimately about securing more of your wealth for your loved ones and planning for what will happen after your death to make the lives of your loved ones much easier.

Peace of mind
Making sure that you’ve made plans for after you’re gone will give you peace of mind. It’s not nice to think about, but it means that your loved ones can carry out your wishes and be protected from Inheritance Tax.

You don’t have to be wealthy for your estate to be liable for Inheritance Tax, and it isn’t something that is paid only on death: it may also have to be paid on gifts made during someone’s lifetime. Your estate will be liable if it is valued over the current IHT threshold on your death. The Inheritance Tax threshold, or ‘Nil Rate Band’ (NRB), is fixed until 2020/21 at £325,000.

Your estate includes any gifts you may have made within seven years of your death. Anything under the Inheritance Tax threshold is not taxed (the Nil Rate Band), and everything above it is taxed, currently at 40%. Where a person dies and leaves at least 10% of their net estate to a qualifying charity, a reduced rate of 36% Inheritance Tax can be payable.

Any unused proportion of the NRB belonging to the first spouse or registered civil partner to die can be passed to the surviving spouse or registered civil partner.

Additional Nil Rate Band
From 6 April 2017, the Government will be introducing an Additional Nil Rate Band (ANRB). This will start at £100,000 and increase by £25,000 each tax year until it reaches £175,000 in 2020/21, when it will increase each tax year by the Consumer Price Index (CPI).

The ANRB will be available when you pass your house to your children, grandchildren or great-grandchildren. It will also be available if you downsize or cease to own a home, as long as the replacement is passed to your children, grandchildren or great-grandchildren. It will start to reduce if your net estate is more than £2m and will reduce by £1 for ever £2 it is over. As with the NRB, the ANRB is transferable between spouses and registered civil partnerships if unused on first death.

Moving ownership of assets to your spouse or registered civil partner may help reduce the Inheritance Tax liability on your estate. However, don’t forget that this can cause an increased Inheritance Tax liability when they die. There are also exemptions if you make a donation to a charity.

Making gifts
If you can afford to make gifts during your lifetime, this will also reduce the value of your estate, and so your ultimate Inheritance Tax liability. You can make a gift of up to £3,000 a year without any Inheritance Tax liability, and if you don’t use this whole allowance it can be carried forward to the next tax year. You can also give gifts of up to £250 a year to any number of people with no IHT liability.

There are two types of gift which currently have tax implications. The first is Chargeable Lifetime Transfers (CLTs). The most common chargeable transfers are lifetime gifts into Discretionary Trusts. A transfer will be charged (together with any chargeable transfers made in the previous seven years) if it exceeds the Inheritance Tax NRB (currently £325,000). Tax is paid at 20% on excess over the NRB.

The other type of gift to be aware of is Potentially Exempt Transfers (PETs). Gifts between individuals or into a bare trust arrangement are examples of PETs. These gifts are free from Inheritance Tax, provided you survive more than seven years beyond the date of the gift. The other area to be aware of is if you are making a gift but try to reserve any of the benefit for yourself, for example, retaining dividend income from shares you have gifted or living rent-free in a property you have.

Life insurance policy
Taking out a life insurance policy written under an appropriate trust could be used towards paying any Inheritance Tax liability. Under normal circumstances, the payout from a life insurance policy will form part of your legal estate and may therefore be subject to Inheritance Tax. By writing a life insurance policy in an appropriate trust, the proceeds from the policy can be paid directly to the beneficiaries rather than to your legal estate, and will therefore not be taken into account when Inheritance Tax is calculated. It also means payment to your beneficiaries will probably be quicker, as the money will not go through probate.