Inheritance Tax Advice – Business Live
Following my two recent columns on inheritance tax, I have a few other helpful tips from your questions that you might find helpful.
I used to park for free on the street, at the hospital; there was no tax on my insurance premiums; the NHS provided me with care when I needed it. I could go on.
Meanwhile, I can send a split second ‘letter’ (email) and cut huge paper costs and time, create a business transaction in an hour that would have taken days with faxes, letters. and stamps. I can attend meetings all over the world instantly with my shorts and flip flops on, as long as I have a nice shirt. My little phone is over 500 times the size of my first computer, and my broadband connects over 1,000 times faster than my first computer.
If everything is so much easier, then why are my costs constantly increasing and taxes going up?
Thus, after having been taxed at the highest point in our lifetime, the ever popular inheritance tax takes its share of 40%. Your pension: People under 75 in the event of death are allowed to transfer all of their pension benefits to a defined contribution plan directly to their beneficiaries without having to pay tax. Then there is a tax applicable at the marginal rate of the beneficiary’s income tax.
It is therefore wise during your lifetime (up to age 75) to use your taxable income and your savings within your taxable heritage to provide you with income and capital and allow this pot to build up.
Life Insurance: I’ve written about this before, but a little advice: if you want to keep all of your investments smooth and always under control, you can insure against it.
Normally, when you purchase insurance for a large tax sum, the premiums can be high, but this is when you set it up with joint first-to-die life insurance. A joint life insurance policy on the second death is less expensive and it is the plan normally needed to protect against the cost of inheritance tax.
You calculate the potential tax, insure yourself and your partner against this amount and establish the payment plan on the second death. The amount is put into a trust that goes directly to the tax-free beneficiaries who then pay the tax bill. I can argue that premiums pay some of the tax up front, but there is tremendous flexibility in knowing that you don’t need to lock in assets now.
Those with a large amount of fixed assets, especially after their recent increase (a house and things that aren’t liquid like cash) can be a bit tied to capital. How to donate your house while keeping an interest in it without falling into the gift trap with reservation rules for example?
One of the many options is to create debt inside your estate while moving money outside of your estate. If you use an equity release plan with an independent financial advisor and your lawyer and raise money against the house, the debt inside your estate increases. On death, this debt is subtracted from your taxable wealth, which reduces the tax payable.
During this time, the capital that you have raised is of course still inside the estate, so it is placed in a trust for the benefit of the beneficiaries. There are a lot of options out there, but I’ll use the discounted gift trust I mentioned a few weeks ago to explain a way to get this out of the estate.
The capital raised against the house is placed in a trust which gives you access to withdrawals (your “income”) from the trust for the rest of your life. After seven years, the money offered is out of the domain with the growth of the domain, but it also gets a discount in between.
Income calculates your entitlement to withdrawals (your “income”) and depending on the amount and age, the gift is discounted.
So, after seven years, you have debt inside your estate and the capital and its growth outside the estate. As withdrawals come in every year, they could be redirected to the beneficiaries so that they never go into the estate.
Peter McGahan is the Managing Director of the independent financial advisor Worldwide Financial Planning . Worldwide Financial Planning is authorized and regulated by the Financial Conduct Authority. The FCA does not regulate credit cards, will drafting, and some forms of mortgage and estate planning.
The information provided is for guidance only and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of stocks and investments can go down as well as up. Your home can be repossessed if you don’t pay off your mortgage.