Great Financial Ideas Newsletter - May 2013

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Apparently 80% of estates that pay Inheritance Tax could have avoided that charge if planning had been put in place during the lifetime. People often think that the only way to avoid inheritance tax is to give assets away. If they don’t think that they believe the only purpose is to avoid tax. However, often by rearranging your affairs you can be better off and remain Inheritance Tax Free.

Death can be an expensive business as these figures show:

Estate value       IHT Liability

£325,000           Nil
£500,000           £70,000
£750,000           £170,000
£1,000,000        £270,000
£2,000,000        £670,000
£5,000,000        £1,870,000

Here are 5 reasons clients put planning in place in their lifetime

  1. Avoid 40% of their wealth disappearing in tax
    In most cases clients would rather see their children benefit from their money rather than the state. Some wish to pass some wealth to children in their life time. Others simply wish to leave their estate in a clear and tax free way to their family on death. Making tax free gifts during lifetime and on death are possible with a little planning during lifetime.

  2. Provide income or retain capital for the future financial security of loved ones
    It is not uncommon to put money into trust for the future education or maintenance of children or a spouse. Likewise a husband and wife may hold their home as tenants in common and in the will instruct that their share of the property is used for the surviving spouse for life and then passes to the children. In both cases the use of a trust ensures capital and income is set aside for a specific purpose.

  3. To reliably ensure wealth is used as the donor intends
    There is a saying that you never really know someone until you share an inheritance with them. In order to avoid uncertainty and family disputes on death a clear will and direction of assets into trust on death with specific letters of wishes avoids confusion and ensures assets end up where the donor would have intended. It can also save a lot of tax.

  4. To do planning now but retain flexibility into the future
    By placing wealth in discretionary trusts either during lifetime or on death the donor (settlor) effectively avoids tax but leaves the absolute direction of the assets in the trust until a later stage. A common instance of this is where parents will put money into trust for children and direct the trustees to make bequests to children at their discretion which will depend on how they think the children are going to spend the money. Alternatively the money could be used for specific matters such as education or property purchase. In this way the planning is put in place immediately but the ultimate beneficiary will be determined by future events, thus retaining flexibility over how the trust money is distributed.

    Another way to retain flexibility is to put assets into investments that qualify for Business Property Relief. Such investments are outside the estate after two years but the capital and interest are still available to the investor in their lifetime should they need it.

  5. Retain control of family wealth through the generations and avoid unintended consequences
    By placing property in trust on death or in lifetime the donor (settlor) can retain control over that money and ensure it ends up going their children. Without proper planning this may not actually be the case.

    One common example of this is where say a husband sells a business and promptly dies. The proceeds pass to his wife who remarries. Any old will is automatically nullified on remarriage. The wife then dies and what was the first husband’s wealth passes to the new husband. The unintended consequence of this is the children of the person who created the wealth do not ultimately enjoy the benefit. It is highly unlikely that this was ever intended by either the first husband or his wife but it is an unintended consequence of not planning.

    Another simpler example is where a child inherits money from their parents, marries and divorces and half the inheritance passes to the former spouse. Again by simply planning in advance the gift can be made to avoid such a consequence.

    So if you are planning on passing wealth to your children either in lifetime or on death (and who isn’t?) then make sure you plan for it in advance. Above are at least 5 good reasons why you should do so.

If you would like to discuss any of the ideas in this blog please give me a call.

Andy Parker
Chartered Accountant & Chartered Financial Planner

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For advice on all accountancy and financial issues contact Parker Chartered Accountants and Financial Advisors on 0121 704 1354.


Andy Parker
Parker Chartered Accountants + Financial Advisors

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