Tax
Planning
INHERITANCE TAX
Have you ever considered what the value of your estate would be if you were to die tomorrow?
Many people might be surprised at how large their estate would be if they take in to account the value of their home, life insurance policies, and perhaps death in service benefits. They might also be surprised at the amount of Inheritance Tax to be paid. On a estate of £430,000 the tax payable would be nearly £62,000; on an estate of £530,000 the tax would be £102,000.
The tax that may be paid when a person dies is Inheritance Tax (IHT). It is also payable on certain types of lifetime gifts.
The first £275,000 of your estate (the nil rate band) is taxed at a nil rate but the whole of your estate above that figure may be taxed at 40%.
Reliefs or exemptions are available for gifts of certain types of property (for example a business or assets used in a business) or for gifts to certain persons (for example one's husband or wife or to a charity).
Simple IHT planning involves arranging your affairs so as to make best use of the nil rate band and of these other exemptions. It is not our practice to suggest complex or risky schemes. The methods we propose to clients are always simple and straightforward; after all it is your financial security that is the paramount consideration, not reducing your tax bill.
Usually the first consideration will be a tax efficient Will. We can advise on the best way of reducing the tax bill on your death whilst at the same time making sure that your family is safely provided for. When a husband and wife are making Wills careful use of the nil rate band can allow you to save over £110,000 in tax.
Lifetime gifts, whether absolute or into a trust, and trusts of life insurance policies can also be useful tools in minimising IHT.
We can advise on what type of gift to use and prepare all the necessary documents. We can also handle the technical administration of trusts such as annual accounts and tax returns.
THE TAX TREATMENT OF DISCRETIONARY TRUSTS
Inheritance Tax
A discretionary trust has its own Inheritance Tax regime. As long as the Trust continues there will be a periodical charge to Inheritance Tax which works as follows:-
- The Trust Fund is valued on every tenth anniversary of its creation. In the case of a trust arising under a Will, this means every tenth anniversary of the death of the person who made the Will
- The current nil rate band is deducted from the value of the fund at that anniversary date
- The excess of the value of the trust fund above the current nil rate band is taxed at 6.0%
Capital Gains Tax
The Trustees only get half the annual exemption of an individual
- Capital Gains Tax on Trusts is charged at 40%
- When assets are transferred out of a Trust to a beneficiary there is a disposal for Capital Gains Tax purposes and the Trustees may be liable to tax if the asset is
- There is no tax free uplift in base value when a beneficiary dies
- However, if a significant proportion of the discretionary trust fund comprises the value of property or of a share in property in which the principal beneficiary is living the Trustees would be entitled to the usual main residence exemption from Capital Gains Tax
Income Tax
- The Trustees pay income tax on trust income at 40% or 32.5% for divident income
- Income paid out to a beneficiary will always be net of tax
- The beneficiary will state the trust income in their personal tax return
- If the beneficiary pays tax at a rate that is lower than 40% they will be entitled to a refund