Preserving your wealth for future generations Towry s Guide to Estate Planning
About Towry We are one of the UK s leading wealth advisers and specialise in providing high quality, expert fi nancial advice to private individuals, families and trustees. Established over 50 years ago, we have 20 offi ces across the UK and look after the fi nancial needs of over 25,000 clients. When you seek advice from Towry, you have the reassurance of knowing that all our wealth advisers are highly qualified. In fact, the majority have achieved Chartered Financial Planner status, the highest professional qualification in the industry. One important difference of our service is our advice is Towry s advice, rather than the experience and thoughts of one individual. We achieve this by working as a team, where our wealth advisers work alongside wealth planning and technical experts. What sets us apart from other advisers is that we believe that your financial decisions should be made as part of a personal financial plan which is structured to help you achieve your short and long-term financial goals. Any Estate Planning strategy should be developed in the context of this wider financial plan. 2 www.towry.com
Your guide to passing on your assets effectively In the past, inheritance tax (IHT) planning used to be an activity confined to the very rich. However, growing affluence means that this is no longer the case. Even families and individuals with a relatively moderate level of wealth, now need to plan ahead to ensure that their assets are passed on to their loved ones as efficiently as possible. Of course, inheritance tax mitigation is only one of the factors that you need to consider when passing on your wealth. Estate Planning can be defined as passing your estate to the people that matter to you in the most effective way. While mitigating IHT is often the cornerstone of Estate Planning, it can also include how to protect your assets, for example, if your children divorce. Retaining sufficient control over who the recipients are and when benefits are paid are also key considerations. It s also important that any actions you take do not place your own standard of living at risk and that you have a safety net if something unforeseen happens. Planning ahead is crucial Whether inheritance tax is an issue for you or not, it s always a good idea to plan ahead and consider how those closest to you will be affected when you die. This guide will give you a broad outline of many of the considerations and actions you can take concerning your estate. It s important to note that Estate Planning is a complex area and it is highly unlikely that any problem you have can be solved through a single action. We believe getting expert professional advice can make all the difference. A wealth adviser can work with you to put together the right plan for your particular circumstances. www.towry.com 3
What is inheritance tax? Inheritance tax (IHT) is essentially a tax on the transfer of your assets. This can be while you are alive or on death. So anytime you make a gift of money or any other asset you need to consider the tax implications. An estate will be subject to inheritance tax if, on death, it exceeds the IHT threshold. Known as the Nil Rate Band, this is effectively a tax-free allowance and it is currently set at 325,000. IHT is charged at 40% on everything above this level (although this reduces to 36% if you gift more than 10% of your taxable estate to charity). An illustration of how much tax could be payable on an estate is shown in the chart below. IHT normally becomes payable on your death. However, if you gift too much money using a trust during your lifetime it is possible that you will have to pay tax at the time of making the gift. Generally speaking, if you are UK domiciled, or have made Britain your permanent home, all your worldwide assets including personal items and any assets held offshore are taxable. How much inheritance tax could you pay? 2,000,000 1,800,000 1,600,000 1,400,000 IHT Liability Remainder Nil Rate Band 470,000 670,000 1,200,000 1,000,000 190,000 270,000 800,000 600,000 70,000 400,000 200,000 0 325k 500k 800k 1m 1.5m 2m Estate size Assumes one full Nil Rate Band is available. 4 www.towry.com
Calculating whether you have a potential liability To estimate how much inheritance tax you may have to pay, simply add up the value of all your wealth, subtract 325,000 and then multiply the remainder by 40%. Married couples (or civil partners) can add up their combined estates and reduce this by two allowances of 325,000 before applying the 40% rate to estimate their liability. We have given an example below. You should note that this is just an estimate. If you have made gifts in the last seven years some of your Nil Rate Band allowance may already have been used. If you have been widowed in the past, with careful planning you may be able to use more than one allowance as an individual, and as many as four allowances for married couples who have previously been widowed. For more information please refer to page 8. Examples of how tax or tax relief may apply are based on our understanding of current tax legislation. Whether any tax will be payable, at what level it is charged and whether you qualify for tax relief will depend upon individual circumstances and may be subject to change in the future. Value ( ) Property 600,000 Life Assurance (not written in trust) 200,000 Savings and Investments 130,000 Car 25,000 Other valuables and possessions 35,000 Total assets 990,000 Amount above 650,000 (2 x Nil Rate Bands of 325,000) 340,000 Inheritance Tax @ 40% 136,000 www.towry.com 5
A systematic way to plan your estate Successful Estate Planning is dependent on getting the foundations right and it is most effective when it is conducted early. The later you leave it, the more limited your options will be. At Towry, we believe the best way to approach Estate Planning is to adopt a systematic process. The first step is to define what you want to achieve. You need to decide, for example, who you want to benefit from your estate and when the benefits will be received. Another consideration is whether you want to give away your assets outright or if you want to retain some control over them. and any pensions and life assurance you may have. The best solution will be built around your needs and should take account of all the options available. This may involve some simple actions like reducing the size of your estate through spending and gifting. There are many different options available to you and seeking advice will help you consider them all. Of course, family situations alter and estates can grow or shrink. Tax legislation and allowances also change. So, whatever actions and solutions you put in place, it is important to review them regularly. When deciding what you want to achieve, you need to look at the whole picture. For example, you should consider any businesses you own 6 www.towry.com
The four-step approach to inheritance tax mitigation Effective IHT mitigation is about getting the right balance between maintaining access to your money when you need it and saving tax. This is because, in general, the more tax efficient a solution is, the less access you have to your assets. Safeguarding your own financial future is very important and giving too much away could put this at risk. We believe successful Estate Planning can be distilled into four broad steps. Step 1 Initial actions Before utilising some of the more commonly considered solutions covered in steps two to four, there are some fast-acting, remedial actions that can be taken to reduce an inheritance tax liability or to prevent it from getting rapidly worse. These potential quick wins include: Writing existing life policies in trust life cover will fall into an estate if it is not placed in a trust and so 40% of the sum assured could potentially be lost in tax Leaving lump sum death benefits from pensions into a trust if you die before age 75, lump sums payable from untouched pension funds are usually tax free. However, if these are left to the surviving partner they form part of their estate on death. By pre-arranging for these benefits to be added to a trust, tax can be avoided on the second death Using deeds of variation these allow the recipient of a recent inheritance to vary the deceased s will in order to pass money either outright to other people or to a trust. This can be immediately effective in reducing the original beneficiary s liability on the money they received Have you considered creating a Lasting Power of Attorney? A Lasting Power of Attorney gives someone the authority to handle your financial affairs if you are no longer able to manage them yourself. It may never be needed, but if you do not have one and you lose the capacity to make decisions for yourself, it can be costly and complex to administer your affairs through the courts. www.towry.com 7
Step 2 Make the best use of allowances and reliefs As we highlighted earlier, an estate is only subject to inheritance tax if an individual s assets are worth more than their Nil Rate Band allowance of 325,000. So, if you are single and have made no significant gifts in the last seven years, there will be no IHT to pay on the first 325,000 of your estate. Anything above this would be taxed at 40%. The good news is that a couple have two Nil Rate Band allowances (one each). Any unused allowance is transferable to the surviving spouse and so, based on the current Nil Rate Band allowance, the surviving spouse can leave an estate of up to 650,000 without it incurring IHT. In some cases, careful drafting of a will may enable a married couple to benefit from more than two Nil Rate Band allowances. This is the case with a married couple where one or both have been previously widowed. The other main reliefs available are Business Property Relief and Agricultural Property Relief. There are some specialist investment solutions which utilise Business Property Relief, although care needs to be taken when using them. Thorough research needs to be undertaken to understand the investment risks they pose and how accessible your funds would be when they are needed. Nil Rate Band frozen until 2018 When considering your allowances it s important to remember that the Nil Rate Band has been frozen until April 2018. So if your assets increase in value over the next few years perhaps through increasing property values or rising stock markets your potential liability to IHT could increase too. 8 www.towry.com
Step 3 Reduce your estate by gifting and spending Once you have made use of your allowances and reliefs the next step is to consider reducing your tax liability by reducing the size of your estate. This can be done by gifting, but don t forget the option of spending a little more on yourself, perhaps on holidays or other large ticket items. Many people deprive themselves unnecessarily in later life, either through habit or fear of running out of money. A gift must be outright if it is to be effective in reducing your inheritance tax liability. Giving an asset away but keeping an interest in it for example, giving your house to your children but continuing to live in it rent-free will be seen as still belonging to you for tax purposes. Before you start the process of gifting, it can be really useful to have a cashflow forecast. This would consider your current income and known expenditure along with other factors such as possible future care costs. It will arm you with the information you require to decide how much money you need to enjoy your retirement, or can afford to give away to help others, without leaving yourself vulnerable if you need care in the future. Towry can help you with this if you seek Estate Planning advice from us. Exempt gifts If gifting is right for you, there are a number of gifts which are exempt from inheritance tax and these are detailed below. They are generally limited in size but the advantage is they are immediately effective. You can make gifts in excess of these amounts, but generally you would need to live for seven years if these gifts are to be effective. Exempt gifts (lifetime exemptions) Annual exemption up to 3,000 per year per donor (once you have used this year s allowance, any unused part of last year s allowance can then be used, but not earlier years) Small gifts up to 250 per year per recipient (you can gift this amount to any number of people) Marriage gifts parents and grandparents can make gifts on the marriage of their children or grandchildren (up to 5,000 and 2,500 respectively) Gifts from income you can make regular gifts from income, provided they do not reduce your standard of living Exempt gifts (lifetime and on death through a will) Married couples exemption any transfers between spouses/civil partners Gifts to UK charities and political parties not only is the gift itself exempt, but if you gift more than 10% of your taxable estate to charity, the rate of IHT on the rest of the estate is reduced to 36%. You can therefore donate to your favourite charity while potentially saving inheritance tax all at the same time www.towry.com 9
Potentially Exempt Transfers (PETs) Any outright gifts you make to individuals will be exempt from inheritance tax so long as you live for a period of seven years. These are known as Potentially Exempt Transfers (PETs) and there is no limit on the value of your gifts. If you die within seven years of making a gift, it will be counted against your Nil Rate Band on death. Gifts in excess of your available Nil Rate Band will create an inheritance tax liability for the recipients. However, if you die between three and seven years of making a gift there can still be a potential tax saving through Taper Relief. Trusts Gifts to trusts are more complicated and more costly than giving an outright gift but they do offer some advantages. For example, they can be useful if you want to protect your money from divorce, bankruptcy of the recipient or from irresponsible spending. They can also be useful when providing for vulnerable beneficiaries. There are various types of trusts available and their tax treatment differs. This is a complex area of Estate Planning and we recommend that you seek advice before making any decisions. Gifts made to some trusts are also considered as PETs. However, an immediate tax charge can apply to most trusts if excessively large gifts are made to them. The main types of trust Bare (Absolute) Gift Trusts these are usually set up for a child who, at age 18, receives absolute entitlement to all the trust s assets. Beneficiaries are decided at outset and cannot be changed Discretionary Gift Trusts used by donors wishing to retain flexibility over who the beneficiaries will be, by how much and when the benefits will be received Loan Trusts money can be lent rather than gifted to a trust, allowing the donor access to the money if they need it. The loan is still subject to inheritance tax, but any growth on the trust s assets is not liable to inheritance tax from the time the loan is made Discounted Gift Trusts used by donors who wish to give away assets, but retain a fixed income from them for the remainder of their life. If the donor dies within seven years there may still be a tax saving in most cases 10 www.towry.com
Step 4 Pay the liability efficiently If you still have an IHT liability on your estate after taking the steps above or if you have made gifts which have created a potential liability for the recipients if you die within seven years you should consider how you can fund this liability in the most efficient way. This will typically involve using life cover and common examples include: Whole of life policies to generate a payment on death to cover the tax liability on the estate Reducing term policies to cover the tax liability payable by the recipient of a gift if the donor dies within seven years Specialist solutions Over and above the strategies already highlighted, there are other specialist solutions which can be used for Estate Planning purposes. These include Enterprise Investment Schemes and other investments which utilise Business Property Relief. We recommend that you seek expert advice if you are considering such specialist solutions. They should form only a small part of your portfolio and be considered once other planning opportunities have been fully explored. Such solutions, known as Tax-led Investments, are generally longer-term investments which may be higher risk, difficult to sell or lose their tax status through decisions made by the investment manager and you may get back less than expected. The key to successful Estate Planning We hope this Guide has been useful in giving you a broad picture of some of the considerations you need to make concerning your estate. In summary, success depends on: Planning early Defining your goals Looking at the whole picture Reviewing all your options Being sensible about how much you give away Understanding the risks associated with any investments you use Estate Planning is a complex area and although we have tried to simplify the principles in this brochure by looking at the solutions in isolation, the majority of our clients require a strategy which incorporates a combination of different solutions. Advice from an adviser with specialist knowledge in Estate Planning is essential if you are to achieve the best result for your circumstances. To arrange a consultation with one of our wealth advisers, simply get in touch with us today. Please call 0845 788 9933 or visit www.towry.com Reviewing regularly www.towry.com 11
Towry Limited Towry House Western Road Bracknell RG12 1TL 0845 788 9933 info@towry.com www.towry.com If you would like to know more about Estate Planning, please get in touch to discuss how we can help you. Call 0845 788 9933 or visit www.towry.com Towry Limited is authorised and regulated by the Financial Conduct Authority. Advice in relation to trusts and inheritance tax planning is not regulated by the Financial Conduct Authority, however, the products used in relation to trusts and to mitigate tax may be regulated. TA1082/September 2013