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FINANCE UPDATES
MARCH 2013
Inheritance tax This short guide is designed to help you understand, prepare for and minimise the potential impact of inheritance tax on your wealth and estate.
The facts
Protecting your wealth
Although not everybody has to pay inheritance tax (IHT), 14,600 UK estates did in 2009/10 and this number is likely to rise. Once labelled a ‘voluntary’ tax, the reality is that unless you start planning as soon as possible, your wealth may well be eroded by IHT when you die.
The good news is that even if you think your estate will be taxable, there are measures you can take now to reduce the tax payable.
When is IHT due? In its current form, IHT is due if your estate is valued in excess of the IHT threshold of £325,000 or £650,000 for a married couple or civil partners at death. What are the IHT rates? For the 2012/13 tax year IHT is charged at a standard rate of 40 per cent on anything in excess of the threshold, unless the estate qualifies for a reduced rate due to a charitable donation. The rate of 40 per cent reduces to 36 per cent if you leave at least 10 per cent of your net estate to a qualifying charity. Gosforth Park Avenue, Newcastle upon Tyne Tyne & Wear NE12 8EG 0191 256 9600 [email protected]
Gifts Giving to your family and friends could be a way to both provide for their futures and reduce the IHT due on your estate. However, it is worth bearing in mind that when a gift has been made it becomes the property of the recipient and you cannot retain any rights to the income or capital from the gift. There are three main types of gift:
Estate UPDATE exemptions can be carried forward into the next tax year only t Gifts from income - you can make regular gifts as long as they are made from your post-tax income, are habitual and leave you with sufficient income to maintain your standard of living t Marriage gifts - parents and grandparents can give one-off gifts at marriage of up to £5,000 to children and £2,500 to grandchildren t Small gifts - in each tax year you can give up to £250 to as many people as you like t Charitable or political party donations are exempt.
1.Exempt gifts These are immediately free from IHT and include:
2. Potentially exempt transfers
t Exemption for married couples and civil partners - any amount can be transferred free from IHT
These gifts might be free from IHT and most will be, assuming the gift is made at least seven years before the person giving it dies.
t Annual exemption - you can make a gift up to £3,000 each tax year without paying IHT. Unused
In theory, there is no limit to the value you can gift in this way and, even www.blackett-walker.co.uk
Inheritance tax if the donor does not live for seven years after gifting, the amount of tax due will be reduced on a sliding scale (‘taper relief’) as follows: Charge on gifts within seven years of death Years before death 0-3
3-4
4-5 5-6 6-7
Tax reduced by (%) 0
20
40
60
Depending on your circumstances, you may also choose to reduce the impact of IHT by taking out a ‘whole of life’ insurance policy that is written in trust. This can be paid for monthly or with a one-off lump sum and the death benefit can be used to meet some or all of the IHT due. Like trusts, life insurance used for IHT planning can be complicated and it is vital that you seek professional advice.
80 Business property relief
3. Chargeable gifts These will usually be subject to IHT at half the rate you would pay at death, so 20 per cent for the 2012/13 tax year. The most common examples of chargeable gifts or transfers are those into trusts, particularly discretionary trusts, which may never be subject to tax in another person’s estate. A charge is only due if the value of the transfer is more than £325,000. Trusts Trusts can play an important role in IHT planning. Unlike other lifetime gifts, which become the property of the recipient, gifts made via a trust such as a discretionary trust allow you to remain in control of where they are invested and, within limits, how the assets are distributed to the beneficiaries, whilst reducing the value of your estate and consequent IHT liability.
In general, a business you control will attract business property relief of100 per cent. In other words, your business can be passed on with no IHT being paid. Assets owned by you but used by a partnership in which you are a partner, or a company you control, attract business property relief of 50 per cent. Similar reliefs apply to agricultural property and qualifying investments (see below). Investments There are some investments that become exempt from IHT: 1. Alternative Investment Market (AIM) shares Money invested in certain AIM-listed companies falls outside of your estate for IHT purposes after two years. This is because it becomes eligible for Business Property Relief (BPR) at 100 per cent. However, not all AIM shares are eligible for BPR and investing in AIM companies is considered high risk, so professional advice should be sought.
Transfers into a discretionary trust are taxable if the value plus that of any earlier transfers is greater than the nil rate band threshold (£325,000). The IHT rate is a reduced rate of 20 per cent, unless the settlor dies within seven years of the transfer, when a further 20 per cent will be payable. There are also IHT charges on trusts due every 10 years.
2. Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
There are several types of trust available. Discretionary trusts are generally the most widely used and flexible but rules do vary and it is important to seek professional advice. Life insurance
Summary
You should review your life insurance policies and, when appropriate, have the death benefits written under trust. This means that when you die the benefits fall outside of your estate and are not subject to IHT.
Business Property Relief at 100 per cent also applies to shareholdings in EIS and SEIS qualifying companies after two years. Again, EIS and SEIS schemes can be complicated and/or high risk, so professional advice should be sought.
It is vital to start planning for IHT as early as possible because there are many ways that you can minimise any potential impact. Keeping track of your estate’s value is also paramount. It can easily creep up without you noticing and, now that the nil rate band looks set to be frozen at £325,000 until 2019, many more estates are going to become taxable. We can help you ensure your estate is not left vulnerable to inheritance tax.
Important information This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. The value of pensions can fall as well as rise and you may not get back the full amount you originally invested. Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. E & OE. Blackett Walker Ltd is Authorised & Regulated by the Financial Services Authority. Registered in England Number 2895559.
MARCH 2013
Inheritance tax This short guide is designed to help you understand, prepare for and minimise the potential impact of inheritance tax on your wealth and estate.
The facts
Protecting your wealth
Although not everybody has to pay inheritance tax (IHT), 14,600 UK estates did in 2009/10 and this number is likely to rise. Once labelled a ‘voluntary’ tax, the reality is that unless you start planning as soon as possible, your wealth may well be eroded by IHT when you die.
The good news is that even if you think your estate will be taxable, there are measures you can take now to reduce the tax payable.
When is IHT due? In its current form, IHT is due if your estate is valued in excess of the IHT threshold of £325,000 or £650,000 for a married couple or civil partners at death. What are the IHT rates? For the 2012/13 tax year IHT is charged at a standard rate of 40 per cent on anything in excess of the threshold, unless the estate qualifies for a reduced rate due to a charitable donation. The rate of 40 per cent reduces to 36 per cent if you leave at least 10 per cent of your net estate to a qualifying charity. Gosforth Park Avenue, Newcastle upon Tyne Tyne & Wear NE12 8EG 0191 256 9600 [email protected]
Gifts Giving to your family and friends could be a way to both provide for their futures and reduce the IHT due on your estate. However, it is worth bearing in mind that when a gift has been made it becomes the property of the recipient and you cannot retain any rights to the income or capital from the gift. There are three main types of gift:
Estate UPDATE exemptions can be carried forward into the next tax year only t Gifts from income - you can make regular gifts as long as they are made from your post-tax income, are habitual and leave you with sufficient income to maintain your standard of living t Marriage gifts - parents and grandparents can give one-off gifts at marriage of up to £5,000 to children and £2,500 to grandchildren t Small gifts - in each tax year you can give up to £250 to as many people as you like t Charitable or political party donations are exempt.
1.Exempt gifts These are immediately free from IHT and include:
2. Potentially exempt transfers
t Exemption for married couples and civil partners - any amount can be transferred free from IHT
These gifts might be free from IHT and most will be, assuming the gift is made at least seven years before the person giving it dies.
t Annual exemption - you can make a gift up to £3,000 each tax year without paying IHT. Unused
In theory, there is no limit to the value you can gift in this way and, even www.blackett-walker.co.uk
Inheritance tax if the donor does not live for seven years after gifting, the amount of tax due will be reduced on a sliding scale (‘taper relief’) as follows: Charge on gifts within seven years of death Years before death 0-3
3-4
4-5 5-6 6-7
Tax reduced by (%) 0
20
40
60
Depending on your circumstances, you may also choose to reduce the impact of IHT by taking out a ‘whole of life’ insurance policy that is written in trust. This can be paid for monthly or with a one-off lump sum and the death benefit can be used to meet some or all of the IHT due. Like trusts, life insurance used for IHT planning can be complicated and it is vital that you seek professional advice.
80 Business property relief
3. Chargeable gifts These will usually be subject to IHT at half the rate you would pay at death, so 20 per cent for the 2012/13 tax year. The most common examples of chargeable gifts or transfers are those into trusts, particularly discretionary trusts, which may never be subject to tax in another person’s estate. A charge is only due if the value of the transfer is more than £325,000. Trusts Trusts can play an important role in IHT planning. Unlike other lifetime gifts, which become the property of the recipient, gifts made via a trust such as a discretionary trust allow you to remain in control of where they are invested and, within limits, how the assets are distributed to the beneficiaries, whilst reducing the value of your estate and consequent IHT liability.
In general, a business you control will attract business property relief of100 per cent. In other words, your business can be passed on with no IHT being paid. Assets owned by you but used by a partnership in which you are a partner, or a company you control, attract business property relief of 50 per cent. Similar reliefs apply to agricultural property and qualifying investments (see below). Investments There are some investments that become exempt from IHT: 1. Alternative Investment Market (AIM) shares Money invested in certain AIM-listed companies falls outside of your estate for IHT purposes after two years. This is because it becomes eligible for Business Property Relief (BPR) at 100 per cent. However, not all AIM shares are eligible for BPR and investing in AIM companies is considered high risk, so professional advice should be sought.
Transfers into a discretionary trust are taxable if the value plus that of any earlier transfers is greater than the nil rate band threshold (£325,000). The IHT rate is a reduced rate of 20 per cent, unless the settlor dies within seven years of the transfer, when a further 20 per cent will be payable. There are also IHT charges on trusts due every 10 years.
2. Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS)
There are several types of trust available. Discretionary trusts are generally the most widely used and flexible but rules do vary and it is important to seek professional advice. Life insurance
Summary
You should review your life insurance policies and, when appropriate, have the death benefits written under trust. This means that when you die the benefits fall outside of your estate and are not subject to IHT.
Business Property Relief at 100 per cent also applies to shareholdings in EIS and SEIS qualifying companies after two years. Again, EIS and SEIS schemes can be complicated and/or high risk, so professional advice should be sought.
It is vital to start planning for IHT as early as possible because there are many ways that you can minimise any potential impact. Keeping track of your estate’s value is also paramount. It can easily creep up without you noticing and, now that the nil rate band looks set to be frozen at £325,000 until 2019, many more estates are going to become taxable. We can help you ensure your estate is not left vulnerable to inheritance tax.
Important information This document is solely for information purposes and nothing in this document is intended to constitute advice or a recommendation. You should not make any investment decisions based upon its content. The value of pensions can fall as well as rise and you may not get back the full amount you originally invested. Whilst considerable care has been taken to ensure that the information contained within this document is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information. E & OE. Blackett Walker Ltd is Authorised & Regulated by the Financial Services Authority. Registered in England Number 2895559.
