While it is often considered a taboo topic to discuss financial matters with your immediate family, we believe it should not be, and we want to normalise the need for these conversations to occur sooner rather than later – especially when approaching the later stages of your life.
Prior to having these discussions, it is sensible to consider the following questions:
- Who do you want to receive the assets?
- What do you want them to receive?
- When do you want them to receive the assets?
The reason we believe conversations are particularly important is that you may have spent decades accruing the assets only for them to be ‘lost’ on death because of family, beneficiaries or trustees not having complete knowledge of the assets. This is validated by research¹ that shows an estimated £15billion of assets are currently lying unclaimed in UK accounts of deceased persons.
In the modern era, the use of paper statements and hard copies of documents has diminished and the paper trail to track down assets has become more difficult than ever. This further enhances the need for conversations to occur to ensure at least one party, whether that be a family member or financial professional, has a holistic understanding of your financial position.
£15billion of assets are currently lying unclaimed in UK accounts of deceased persons
While we advocate these conversations, we also note that it is important to ensure that they are handled in the appropriate manner. This may mean not disclosing specific details such as your intended beneficiaries or monetary values to avoid possible family rifts or discouragement to continue working for beneficiaries.
Putting plans in place early
As stated above, your estate is often a cumulation of assets accrued over the entirety of your life and, where possible, people tend to prefer to mitigate the effect Inheritance Tax (IHT) would have by putting plans in place and commencing IHT planning as soon as possible.
The most common form of transfer of capital is a gift to children known as a Potentially Exempt Transfer or “PET” at which time a 7-year clock commences. Only once the 7 years have elapsed will the gift be determined to be fully out of your estate (although there is the benefit of tapering relief) and as such thinking about this at an earlier stage in life may be appropriate to avoid it being retrospectively included back in the estate for inheritance tax purposes.
IHT mitigation
While there are several ways to mitigate an IHT liability, some of the more popular routes currently available are as follows:
- Pension products – assets held in pension products are currently not included in your estate for the purposes of IHT.
- Gifts/gifting allowances – removes assets from your estate which ultimately would have been liable to IHT if retained. There are allowances/exemptions as follows:
- An annual gifting allowance of £3,000 per annum to one individual. The allowance can be carried forward to the subsequent fiscal year, if unused.
- Gifts up to the value of £250 to as many individuals as you like.
- Gifts out of surplus income subject to being proven that it does not affect you standard of living.
- Charitable donations – removing assets from your estate for philanthropical purposes.
- Trust structures – removing assets from your estate into purpose-built structures, which reduce the size of your estate liable to IHT. It should be noted that not all trust structures will be considered exempt from your estate.
The most common form of transfer of capital is a gift to children which is known as a Potentially Exempt Transfer or “PET”
IHT taxation
IHT is levied at 40% on all assets included in your estate, net of any available nil rate band and residential nil rate bands. However, it is possible to reduce the figure to 36% if you leave 10% or more of your estate to charity.
There are some notable assets which are potentially exempt from IHT and would reduce the value of your estate:
- Businesses - depending on how a business is owned and the type of business, you may be able to obtain either 50% or 100% Inheritance Tax relief on the business assets. It is possible for these assets to have been passed on while the owner was alive or as part of the distribution of the estate through the Will, but the business must have been owned for at least two years before death. This is known as Business Relief.
- Agricultural property — you can pass on a farm free from Inheritance Tax if it meets certain conditions. This is known as Agricultural Relief. Some particular assets however, such as farm machinery, are not exempt from tax.
- Woodland property – woodlands used for commercial purposes could get up to 100% Business Relief.
- Heritage assets – This generally only applies to stately homes, land of outstanding natural beauty, or famous works of art. There are certain conditions that must be met to get this relief.
Potential succession planning changes following the next Autumn Budget
We prefer to avoid jumping to conclusions and instead provide guidance and recommendations based on current legislation. However, we note that with the new Labour government there has been speculation of some radical changes to taxation which would affect succession planning such as the inclusion of pension assets in the estate for IHT, but until such a time as this is confirmed we would recommend that this is considered hearsay, and any actions are implemented with current legislation in mind.
It is worth bearing in mind that areas that could be subject to change include pension allowances, capital gains tax rates and IHT, all of which would impact any planning. As and when any changes are implemented, we will ensure our guidance is updated, as appropriate.
