5 May 2021
What to think about when considering estate planning? Whilst tax is important, it should not be the driver for any estate planning. Instead, the starting point is how you would like to see your assets pass on your death and then the estate plan can achieve this as tax effectively as possible. Here, we’ll share the key considerations and what you should have prepared.
So, you’re thinking of your estate and planning to be as tax efficient as possible. What are the key considerations and steps?
Firstly, it’s key to have up to date wills and powers of attorney to make matters smooth and to ensure that all assets pass the way you would like. The last thing you want are for complications to arise around the intestacy rules. You want to feel assured in the knowledge that things are as straight-forward as possible for those administering the estate on your death.
From a tax perspective, when thinking of an estate plan it’s important to establish the extent of the Inheritance Tax (IHT) liability. Most UK resident individuals (and even UK domiciled individuals who are resident outside the UK) are subject to IHT on their worldwide assets. However, those who are non UK domiciled and not deemed domiciled are only subject to IHT on their UK assets.
An estate plan can include gifts to be made during lifetime where this is appropriate and something you are comfortable with. This is particularly important as gifts during lifetime require giving up the assets and the right to receive any income that they generate. You would have to be comfortable that the beneficiaries are ready to receive the assets and that you are happy you would have enough remaining to meet your own needs.
Where lifetime gifts are made to individuals, these fall outside the estate for IHT seven years after the gift is made. So, in other words… if you gift to an individual seven years prior to your death, the value of the gift given is not subject to IHT.
Why? Well, these are referred to as potentially exempt transfers or PETs. If the person who makes the gift passes within the seven years then the value of the gift forms part of their taxable estate on death, with the tax reducing if the gift has been survived by three years.
Gifts to trusts during lifetime are known as chargeable lifetime transfers (CLT’s) and attract a potential 20% immediate IHT charge if over the tax exempt allowance for IHT known as the nil rate band, currently £325,000.
If you’re a non UK domiciled person, you’re able to make gifts from non UK assets without this being a potentially exempt transfer (subject to the seven year rule). So essentially, if you’re non UK domiciled and you gift £325,000+ in UK assets to a trust while you’re alive, the value of that gift will be subject to 20% IHT charge. Whereas if you’re non UK domiciled and were to gift to that trust from non UK assets, you can potentially avoid these gifts/assets being subject to tax.
An individual becomes deemed domiciled after living in the UK for 15 years of the last 20. So, before an individual becomes deemed domiciled, it would be worth considering planning to minimise the IHT on non UK assets. This can include a trust, or other structures.
More generally, there are also a number of exemptions which it is worth being aware of and ensuring that you’ve edit from where possible.
Most people are quite familiar with the spousal exemption for example – this allows assets to pass between a married couple without IHT implications.
For a couple, where one is non UK domiciled and the other is UK domiciled, the spousal exemption would allow assets to pass from the UK domiciled spouse to the non UK domiciled spouse. This is limited to £325,000.
There is also a small annual gift exemption of £3,000, and gifts to a person when they are getting married.
Perhaps the other most valuable exemption, is gifts out of surplus income. You have surplus income if you have more income annually that you need in order to pay your usual living costs. So, gifts out of surplus income allows people to give away the remaining surplus balance, without it being a gift subject to the seven year rule. Such gifts must be made regularly, ideally at least every year.
We’ve shared a few tax efficient strategies and there are far more, especially given the complex nature of your unique financial situation, personal circumstances. If you have any questions you require support with, or you’d like to have a one-to-one consultation, please do get in touch with us.
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