Not putting your policy in trust could leave a loved one at risk of a sizable tax bill. For example, for a £100,000 life assurance policy payout, an IHT bill of £40,000 would be due if if an individual’s estate is worth more than £325,000.
Trusts can be used for your savings as well as for life insurance pay outs. You can select for beneficiaries to receive all, or specific amounts, of the money at the trustee’s discretion.
Six ways to reduce inheritance tax
When Denis Healey was Chancellor of the Exchequer, he called IHT a ‘voluntary tax’ because he said there were many ways to avoid it. He was right – with careful planning and financial advice it is possible to take preventative action to either reduce your beneficiaries’ tax bill – or wipe it out altogether.
1. Make a will
A vital element of effective estate planning is to make a will – unfortunately 70% of adults with children under 18 fail to do so.
This is mainly due to laziness but also a result of the fact that many of us are uncomfortable talking about issues surrounding our death. Making a will ensures your assets are distributed in accordance with your wishes.
This is particularly important if you have a spouse or partner as there is no IHT payable between the two of you but there could be tax payable if you die without a will – and assets end up going to other relatives.
2. Make allowable gifts
You can give cash or gifts worth up to £3,000 each tax year and these will be exempt from IHT when you die.
You can carry forward any unused part of the £3,000 exemption to the following year but then you must use it or lose it.
Parents can give cash or gifts worth up to £5,000 when a child gets married, grandparents up to £2,500 and anyone else up to £1,000. Small gifts of up to £250 a year can also be made to as many people as you like.
3. Give away assets
Parents are increasingly providing children with funds to help them buy their own home. This can be done through a gift and provided the parents survive for seven years after making it, the money usually automatically ends up outside their estate for IHT calculations – irrespective of size.
4. Make use of trusts
Assets can be put in trust, thereby no longer forming part of the estate.
There are many types of trusts available and can be set up simply at little or no charge. They usually involve parents investing a sum of money into a trust. The trust has to be set up with trustees – a suggested minimum of two – whose role is to ensure that on the death of the settlors the investment is paid out according to the settlors’ wishes. In most cases this will be to children or grandchildren.
The most widely used trust is a ‘discretionary’ trust and can be set up in a way that the settlors (parents) still have access to income or parts of the capital.
It can seem daunting to put money away in a trust but they can be unwound in the event of a family crisis and monies returned to the settlors via the beneficiaries.
5. Expenditure out of income rule
As well as putting lump sums into a trust you can also make monthly contributions into certain savings or insurance policies (not ISAs) and put them in trust.
The monthly contributions are potentially subject to IHT, but if you can prove that these payments are made out of your income, without compromising your standard of living, they are exempt.
6. Provide for the tax
If you are not in a position to take avoiding action, an alternative approach is to make provision for paying IHT when it is due.
The tax has to be paid within six months of death (interest is added after this time). Because probate must be granted before any money can be released from an estate, the executor – usually a son or daughter – will often have to borrow money or use their own funds to pay the IHT bill.
This is where life assurance policies written in trust come into their own. A life assurance policy is taken out on both a husband’s and wife’s life with the proceeds payable only on second death.
The amount of cover should be equal to the expected IHT liability. By putting the policy in trust it means it does not form part of the estate.
The proceeds can then be used to pay any IHT bill straightaway without the need for the executors to borrow.
For more information call us today on 0203 540 1667 or visit our website www.betterprotect.co.uk.