Inheritance Tax Planning
In order to safeguard an inheritance so that it is not taxed unnecessarily and it is received safely in the hands of the intended beneficiaries effective estate and UK Inheritance Tax planning will need to consider things like:
Control – If someone left all their assets on death to their spouse / civil partner, along with their unused Nil Rate Band, they will have given over complete control. If the spouse / civil partner re-marries or alters their plans, the assets may end up with a new family, or perhaps, part of a future divorce settlement.
Similarly, if the Nil Rate Band is not “used” by the first to die of a couple, it will be completely lost if the survivor re-marries.
Again, if someone wants to leave assets to a child or grandchild the assets themselves are not ring fenced and could be at risk if the recipient subsequently became bankrupt or divorced. On this basis it may be necessary to consider the use of a Trust.
Flexibility – Using a Trust may ensure assets reach and stay with the intended beneficiary. It may also be possible for the person making a Gift to maintain an interest as a beneficiary and this still be effective for UK Inheritance Tax Planning.
Protection – Using a Trust can help move assets outside of an estate. On this basis they may be able to help reduce the risk assets are exposed to in respect of long term care.
Currently, local authorities can take 100% of all the assets in excess of £22,250 (England & Northern Ireland) to cover the cost of care.There are a number of packaged trust arrangements that can help a large number of individuals UK Inheritance Tax Planning.
These are offered by various financial institutions. Some examples are:
- Discounted Gift Trusts - These are designed for people who do not need access to their capital and want to pass it to their families free from Inheritance Tax, but want to retain the right to draw a regular income.
The Discounted Gift Trust works by making a gift into a single premium insurance bond for your chosen beneficiaries, fixing the level of income you want to draw until your death.
The gift is a Potentially Exempt Transfer so if you survive seven years the insurance bond does not count as part of your estate.
- Loan Trust - These are designed for people who want to retain the right to draw on their original capital as well as income.
You (Settlor) make a loan payment to the trust. The trust then pays back the loan, usually in monthly instalments over 20 years.
Any growth from investments within the trust is immediately outside the estate for UK Inheritance Tax planning purposes. The outstanding loan amount would form part of your estate for UK Inheritance Tax planning purposes.
On death the outstanding loan can be assigned to your beneficiaries or the loan called in and the monies distributed in accordance with the terms of your Will.
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