Trust in tax planning to save family’s inheritance
BRITONS hate inheritance tax with a vengeance but the bad news is that more and more of us are going to be paying it, as the charge becomes increasingly punitive. In his March budget, Chancellor Rishi Sunak froze IHT inheritance tax allowances until 2026, which will drag more middle-britons into the net every year until then.
HM Revenue & Customs is already collecting record amounts of IHT, with revenues topping £6billion last year for the first time, a rise of more than £1billion in just 12 months.
Many fear Sunak will target IHT again in his Autumn Budget on October 27, and tax experts are warning people to reduce exposure if they feel they may get caught out.
You can reduce a potential IHT bill by making gifts to family members using your annual exemptions, but this will only remove relatively small sums from the clutches of HMRC.
Some families take IHT planning to the next level by setting up a trust, and one couple reckons they have saved £100,000 as a result, which they can pass on to their loved ones.
This is more complicated and requires specialist advice, but is it something you should consider?
TAKE SPECIALIST ADVICE
Trust planning allows you to keep control of your assets, while potentially reducing your IHT bill.
Assets held in trust, such as property or shares, do not form part of your estate for IHT purposes, provided you live for seven years after placing them into trust.
Trusts are complicated, so you will need to take specialist tax and financial planning advice as well, and should also keep an eye on the costs, as they can be costly to set up and run.
Brighton couple Vic and Carole Saxby are delighted with their decision to use trust planning to reduce their IHT liability. The couple, who have been married more than 60 years, put a £120,000 lump sum into an inheritance tax trust in June 2006, using the WAY trust, which is a flexible family wealth protection scheme.
Their investment has now more than doubled to £246,000, and none will be subject to IHT when they die.
WISE PROTECTION
Vic, 82, a retired food sales manager, was so pleased with this investment, that in May 2013 he decided to invest a further £102,000 through a second WAY trust. This has also performed well, surging to £170,000 today.
It is now more than seven years since they set up the second trust, so all of this money has fallen out of their estate for inheritance tax.
Vic reckons this is one of his best financial decisions he has made. “We have moved a total of £222,000 into these trusts and now have £416,000 available for our family, completely free of IHT.”
The couple have two children and five grown-up grandchildren, and Vic is delighted to have protected them from the “government’s IHT grab”.
TRIPLE WHAMMY
WAY chairman Paul Wilcox said more families can benefit from trust planning, just like Vic and Carole. He said there are three reasons why “the spectre of IHT” is spooking more and more UK families.
He said: “First, the nil-rate band of £325,000, which is the amount you can pass on free before IHT is charged at 40 per cent, has not risen since 2009.
“Second, estate values have risen due to high stock market returns and spiralling property values,” wilcox added. “Lastly, most UK wealth is owned by the over-60s, who have sadly suffered more deaths than usual due to Covid. I expect this triple tax whammy to continue into 2022.”
CHECK THE COSTS
A number of specialist advisers offer IHT planning services and you can choose from a range of different trusts, with bare trusts the simplest, and discretionary gift trusts highly popular. Consumer champion Which? said whether a trust is the right course of action depends on your personal circumstances.
In some cases, you may have to pay an upfront tax charge, while the trustees will charge to manage the trust, and there are other legal costs, too. So check all of the fees to weigh up if the benefits outweigh the expenses.
‘Originally, IHT was supposed to affect only the super-rich but increasingly it is hitting middle England’
DON’T DELAY
IHT planning is complicated but there are no benefits to waiting. Laura Tommis, trust manager at ZEDRA, warned that IHT exemptions and allowances such as business property relief may all be tightened in future, even if Sunak does not act this month. “It is best to look at how to make full use of reliefs available now, rather than delaying matters.”
Mark Giddens, partner at UHY Hacker Young, said IHT planning is more important than ever as families risk forking out an ever-greater share of their wealth to HMRC.
“IHT was original supposed to affect only the super-rich but is increasingly hitting middle England.”
Sunak is under huge pressure due to pandemic bailouts and a second IHT raid cannot be ruled out. “The pandemic has led to record peacetime borrowing, and the Treasury will be looking to balance the books any way it can,” said Giddens.
He urged families to take action now to ensure they can pass the fruits of their labour to their children, rather than the taxman.