Ronnie, Reggie and George – How to save on Inheritance Tax

 You pay Inheritance tax at 40% – How to save that “eight bob in the pound”

If you missed my talk, to Bury Chamber this morning on Inheritance Tax (‘IHT’) I’ve set out the notes below. The reference above is to Ronnie and Reggie Kray, infamous East End villains of the 1960’s and George is our “wonderful” Chancellor of the Exchequer George Osborne.

When the Krays “knocked over” a bank they would have to launder the proceeds and would normally receive “eight bob in the pound,” 40 P in the pound in modern language. This 40% is the same figure which is charged in  IHT on death. While I wouldn’t seek to compare HMRC with organised crime, the similarity in the percentages struck me as interesting. It was also fun to refer to the object of my talk being to help people save “eight bob in the pound”

My notes probably make a little more sense if you were there, however they convey the spirit of my talk.  if you have any questions or queries then do fee free to give me a call or email me. Contact details on the site and below.

Inheritance Tax (‘IHT’) and Trusts

How to pay less tax and keep control of your assets

 IHT
This is payable at 40% on your death on all the assets you own over £325,000, unless they are exempt.  Property left to a spouse on death is exempt, for instance.  Your property up to this figure is taxed at 0% commonly called the Nil Rate Band (‘NRB’).  If you are married or in a civil partnership this can increase to a maximum of £650,000.   If you make gifts (other than exempt gifts*) in the seven years before you die,  it is important to realise that you could use up your NRB with the result that IHT may be payable on more of your assets when you die.

Note:  All references to spouse/marriage include a Civil Partner/ Civil Partnership.

Trusts
A Trust enables you to remove property from your estate so that it is not subject to IHT when you die.  If the trust is ‘discretionary’, it means that your beneficiaries will not pay IHT when they die.  See below for an explanation of discretionary trusts.  Trusts can also be a good means of controlling the transfer of assets between different generations.

Three steps to avoid paying IHT:

Planning
Trusts
Making a will

Planning – *Making exempt gifts

By planning ahead, documenting the gift and complying with HMRC requirements, you can make a number of exempt gifts.  This reduces your taxable estate and will not use up your NRB.  These include:

Annual exemption – £3,000
Small gifts – £250.00
Gifts on marriage:
to a child – £5,000
to a grandchild – £2,500
to a godchild – £1,000
Gifts out of income
Gifts for maintenance of family
Gifts to spouse
Gifts seven years before death (Potential Exempt Transfers ‘PETS’)

The above sums are per person and can be doubled for a couple

Trusts
Can be created during your lifetime or on your death in your will.  They take two main forms:

Life interest

“My wife may live in my house during her life and, on her death, the property shall pass to my children.”

Discretionary

“My trustees shall hold the trust fund on trust for the benefit of my beneficiaries and shall have the power to distribute it as they deem fit in their absolute discretion.”

Creating an IHT free discretionary trust

This can be done in a number of ways, which include:

Using your NRB in whole or part
Using your annual exemption
Making gifts out of income

You can ‘drip-feed’ funds into the trust, either using surplus income, your annual exemption or both.  Each time you use your annual exemption of £3,000 you save £1,200 in IHT.  After seven years, your NRB is replenished.  This creates a fund which:

Is outside your estate
Can be built up over time
Can grow in value beyond the NRB with no IHT implications
Can be used as you want (apart from your own benefit)
Will not be taxed as part of your estate on your death

Making a will
Under a will you can create a trust which comes into effect on your death.  It avoids all the settlor interest problems*  and can create a flexible mechanism for dealing with your estate once you die.  It can be a life interest or a discretionary trust or an amalgamation of the two.

Things to avoid:
Don’t make yourself a beneficiary:  (*This is known as a settlor interested trust) directly or indirectly  (you may be regarded as benefiting  from assets passing to a spouse or minor children) .  It can have adverse Income and Capital Gains Tax implications.  It may also create a reservation of benefit. 

Don’t create a reservation of benefit:  You must be excluded or virtually excluded from receiving directly or indirectly any benefit from the assets placed in the trust.  A benefit could be obtained through a minor child or spouse.  Placing funds in trust for minor children doesn’t of itself give rise to a reservation of benefit but care must be taken.  If you give away a holiday home, for instance, then you must pay a market rent if you use it for more than two weeks a year.  If you have a reservation of benefit you are treated as still owning the asset and will pay IHT on it.

Create a pre-owned assets charge: This can arise  if you manage to circumvent the reservation of benefit rules.

Have a non-dom spouse:  Your domicile is based on the domicile of your father.  If you are born in the UK and your father was born in Poland then your domicile may be Poland.  If you have a parent who was born overseas or even a grandparent who still has strong links to the ‘home country’ this should be investigated.  You may not have a full spouse exemption.  A spouse can be regarded as domiciled in the UK over time and elect to be treated as domiciled.

Other tax and trust issues
There are favourable tax arrangements when creating a trust for a disabled person.  If you are in business or agriculture, then you may be able to take advantage of agricultural property relief and/or business property relief.  In some cases both reliefs can be claimed.  If you leave 10% of your estate to charity, you pay IHT at 36% and no tax on the gift to charity.

Free initial consultation
If you would like less IHT to be paid when you die, think about making a will or a trust, then contact me for an initial free consultation.

Further information Email nigel@atkinsthomson.com or call him on  01284 767766

(c) Nigel George 05.02.15

Strong>This is general advice and is meant for information purposes only.  It should not be relied upon and specific advice should be obtained on any legal problem.  All legal advice is provided by Atkins Thomson Solicitors Low Green Barn, Nowton, Bury St Edmunds, IP29 5ND authorised and regulated by the Solicitors Regulation Authority No. 441436

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