Helping clients to make effective plans to maximise the amount of their estate which is passed to their chosen beneficiaries after death is a crucial part of the financial planning process. Sean Osborne, Head of National Accounts at Charles Stanley, outlines a few options that planners can consider in such situations
For those individuals looking to minimise the tax impact upon their death, proper inheritance tax planning is key. However, research conducted by Charles Stanley found that only 24% of parents with adult children have spoken openly with them about the issue of inheritance. This is a surprising statistic, considering it is estimated under-45s in the UK stand to inherit more than £1.2trillion.
The role of a financial planner includes encouraging clients to discuss the issue of inheritance with their families, and letting them know all the options they have available to them. It goes without saying that the sooner families start planning their estates, the more choices they will have in order to limit the amount of inheritance tax paid by their loved ones. So, what are their options? We have outlined a few of these below.
Gifting is commonly used in estate planning. Small gifts from normal income are known as ‘exempted gifts’ and there is no inheritance tax to pay on these, or on gifts between spouses or civil partners. In the UK you can give away up to £3,000 worth of gifts each tax year as part of your ‘annual exemption’ and any unused annual exemption can be carried forward onto the next year, although only for one year. Gifts out of this allowance are liable to inheritance tax, and the amount owed depends on when they were gifted. If gifted in the three years before a death, there will be 40% IHT to pay, but after seven years a gift becomes exempt. There is a sliding scale for inheritance tax owed between three to seven years. Gifting is a good option for those who are happy to part ways with money during their lifetime, providing they are aware they will still owe inheritance tax should anything happen within seven years.
Business Property Relief
Business Property Relief (BPR), an established part of inheritance tax legislation since 1976, is a straightforward investment incentive, and is chosen by many who want a chance to grow the inheritance they plan to leave behind. BPR-qualifying shares become exempt from inheritance tax once they have been owned for two years and can cover different kinds of businesses, including AIM listed companies and companies which are not listed. There are always risks associated with investing so it’s key to assess your client’s appetite for risk before considering this route. But if the investments are profitable, it can be a great way of leaving an inheritance without having to give away a large sum of money during your lifetime. It is also one of the quickest ways to turn an investment into a tax exempt one, with two years being a short amount of time compared to gifting a large sum of money.
Family Investment Companies
Family Investment Companies (FIC) can be considered for families with large sums of money. A FIC is a UK registered private company in which current family members become shareholders. Transfers of shares outside a specified level of family connection are generally prohibited, making a FIC different to a standard company. When it comes to estate planning, a Family Investment Company is a great way for individuals to transfer large sums of money that will be passed onto their family, whilst still having some degree of control. Of course, setting up a FIC can be a complex process and there are lots of things that must be taken into consideration when thinking about starting one.
Many view pensions as just a means to support themselves during retirement but in fact a pension can be a very tax-efficient way of passing on wealth to loved ones. Many modern pensions offer a range of ‘death benefits’, which include being able to pass over pensions savings to a nominated loved one. It is important to discuss this with your client’s pension scheme provider, first to ensure the pension actually has this benefit, and second to let them know who your client will be leaving it to, as pension savings are not covered by a Will. These pensions savings are normally free of IHT and not part of a taxable estate. Of course, a pension is also an investment, so it’s recommended that clients are aware of this and that the value may go up as well as down in value.
When it comes to estate planning, there are many options out there, but it’s not straightforward, with a confusing array of inheritance tax rules, particularly with potential changes suggested by the Office of Tax Simplification on the horizon. The first step is making sure clients know it’s good to talk!
About Sean Osborne
Sean is Head of National Accounts at Charles Stanley. He is experienced in building, developing and managing sales teams and defining and delivering sales strategies in order to significantly improve sales volumes. He is a SIPP market expert and has strong knowledge of the platform and investment management arenas.