There is not a one size fits all answer as to what to do with your assets to pass down to your loved ones. Everyone’s situation is unique, and as such should be considered separately when it comes to estate planning.
Estate planning may not be high up on your priority list, after all, no one wants to plan for their death! However, plans which can be put in place to mitigate Inheritance Tax exposure very much need to happen in one’s lifetime, so don’t leave it too late! Once a gift out of your estate has been made, it takes seven years before this is completely excluded upon death and so advance planning is essential.
Lifetime gifts
As opposed to leaving assets to the next generation on death, gifts can be made during your lifetime. Lifetime gifts can reduce your Inheritance Tax exposure; however, such gifts can also lead to various Capital Gains Tax, Stamp Duty and Stamp Duty Land Tax issues which need to be quantified. Careful planning as to what assets are included in lifetime gifts is required as some assets may attract relief against lifetime taxes, making the gift more appealing.
There are also practical considerations when considering assets to be gifted. Considerations such as, do you occupy the asset, do you require the income from the asset and, finally, are you happy to relinquish control of the asset.
Where you are content to gift an asset but are concerned about relinquishing control, a lifetime gift into a discretionary trust could be considered.
What is a trust?
A discretionary trust is a vehicle in which assets can be settled for the benefit of a prescribed beneficiary (or class of beneficiaries), which is managed by designated trustees. The trustees have the discretion to then make distributions (transfers of either income or capital out of the trust) accordingly. A trust can therefore be a great way to pass on assets to those who cannot manage their own assets or who are not old enough to do so.
Why use a trust?
As a settlor, you are also able to be a trustee which allows for control over the assets which have been gifted, whilst still taking steps to remove the asset from your estate.
Many different assets can be settled into trust such as cash, shares or land and property. Using a trust is a ‘Chargeable Lifetime Transfer’ for Inheritance Tax purposes, therefore, Inheritance Tax could be payable on a settlement into trust, if the value of the gift exceeds your available “Nil Rate Band”. Assuming no previous gifts have been made, each individual can gift up to £325,000 into a trust without incurring any lifetime Inheritance Tax.
Where assets are valued in excess of £325,000, there can be advantages to paying some lifetime Inheritance Tax, due to the lifetime rate being 20% compared to the rate upon death of 40%. Thus, potentially halving your Inheritance Tax liability.
As the settlement into trust is a Chargeable Lifetime Transfer for Inheritance Tax purposes, an election can be made to Hold-Over any capital gain arising on the transfer. This can be a further bonus, particularly where non-business assets are concerned such as rental properties which would ordinarily attract Capital Gains Tax on gains arising at up to 28%.
In identifying assets to settle into a trust, particular care must be taken if properties are subject to outstanding mortgages. Ordinarily, where gifts are concerned, there is no consideration and therefore no Stamp Duty Land Tax, however, an outstanding mortgage could change this position.
It is a huge decision to part with assets and one not to be taken lightly. If you feel you have surplus assets and you would like to explore transferring these, please do get in touch with your usual Ellacotts contact to discuss your options.
Please contact Ellacotts if you wish to discuss this article or if you have a query. Contact us on 01295 250401 or email solutions@ellacotts.co.uk. You can also contact us here with your query.
Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
