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> How much inheritance tax might you pay> New IHT tax break on the family home> Strategies the professionals use to minimise inheritance tax> Gifting, Trusts, Wills

Guide to Saving Inheritance Tax and Keeping Wealth in the Family

For more information please call 0117 900 9000 or visit www.hl.co.uk

2016 Budget Update

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This guide sets out the main steps to reduce inheritance tax and keep wealth in the family. It shows the issues a financial adviser considers when providing estate planning advice. It will help you:

How to use this guide

The information contained in this guide provides only general information and does not constitute personal financial advice. The purpose of this guide is to highlight areas you might like to discuss with your adviser or investigate further yourself. It is not a technical guide, so please do not rely on any of this information on its own to make (or refrain from making) any decisions. For advice tailored to your own particular situation, always seek professional advice from an expert or professional. This guide has been written for those who are UK resident and UK

domiciled for tax purposes. Where we refer to married couples this also includes registered civil partnerships. The information in this guide is correct as at April 2016 but may be subject to change. Any tax reliefs referred to are those currently applying, but the level and basis of reliefs from taxation are subject to change. Their value depends on the individual circumstances of the investor. Tax year 2016/17 applies unless otherwise stated.

April 2016

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Chapter 1∙ Value your estate to work out how much IHT

you might pay· IHT plan but not at the expense of your own

financial security

Chapter 2∙ Understand the importance of Wills and powers

of attorney

Chapter 3∙ Understand the options to reduce tax and

maximise legacies ∙ Consider the use of IHT exempt investments

Chapter 4∙ Consider the use of trusts ∙ Minimise IHT from pensions and life insurance

Chapter 5∙ Invest for children

Chapter 6∙ Understand how charitable giving reduces IHT

Chapter 7∙ Understand pension death benefits

Chapter 8∙ Frequently asked questions

Important Investment Notes

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In my experience, inheritance tax (IHT) is one of the least popular taxes. After a lifetime of earnings and investment taxes, the Government could be a major beneficiary of your estate through inheritance tax. “Double taxation” paid by your loved ones.

The announcement of a new tax break aimed at reducing IHT on the family home was welcome given the increasing numbers of estates being subject to death duties. The headlines have detailed inheritance tax breaks on estates up to £1 million. However the detail shows this tax break phases in over the next 4 years.

The resurgent equity and property markets, combined with a freezing of inheritance tax free allowances and exemptions since 2009, means more estates than ever will be subject to IHT yet the government’s reforms will only reduce the number of estates forecast to have a tax liability in 2020-21 to around the same levels as in 2014-15 (source: Budget 2015).

Rule changes Various other rule changes in recent years have improved the IHT position of both ISAs and pensions. For those who are, or will still be caught

Introduction

For more information please contact us on 0117 900 9000 or visit our website www.hl.co.uk

Danny CoxChartered Financial Planner

in an IHT trap, the right forward planning can significantly reduce, or eliminate altogether, any death duty liability. Estate planning is the process which works to keep hard earned family wealth within your family and distributed to your beneficiaries. In simple terms, it involves reducing the amount of inheritance tax you pay.

This guide aims to provide practical guidance to help you plan ahead and reduce the impact of inheritance tax. It looks at the steps a financial adviser would take – showing you the process the professionals use, setting out the simple, common sense steps so you can advise yourself on your estate plans.

However if you have any doubts or need advice our HL Financial Advisers can help, please call 0117 317 1690.

Our Guide to What to do When Someone Dies covers matters such as probate and estate administration. Please go to www.hl.co.uk/free-guides for your free copy.

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the surviving spouse.

Budget proposals - how inheritance tax is changingFrom deaths on or after 6 April 2017, a new main residence nil rate band will also be available in addition to the standard nil rate band.

The main residence nil rate band will be lower than the net value of the home (e.g. after any outstanding mortgage or liabilities) to a maximum of;

• £100,000 for 2017/18 • £125,000 for 2018/19• £150,000 for 2019/20 • £175,000 for 2020/21

1. Value your estate and work out how much IHT you might pay To answer the question: “How large is my inheritance tax bill?” you first need to value your estate, which includes all of your assets, property, cash, investments and possessions (also referred to as “chattels”), both here and abroad. Pensions will not normally be included (pensions are covered in more detail on page 20).

One reason why many people suffer from inheritance tax is they fail to grasp how much their assets have increased in value over time. It’s a useful exercise to do periodically and review your inheritance tax position.

How inheritance tax is calculatedInheritance tax is normally charged at 40% of the value of your estate above a certain amount, known as the inheritance tax threshold or nil rate band. The inheritance tax threshold is £325,000 for 2016/17. In effect, everyone is a higher-rate taxpayer for inheritance tax purposes.

Married couples can combine their inheritance tax thresholds meaning up to the first £650,000 of the estate is inheritance tax free as any unused threshold is normally automatically passed onto

Inheritance tax planning

How much inheritance tax might you pay?Value of your estate

Inheritance tax liabilitySingle Person Married Couple

£325,000 Nil Nil£500,000 £70,000 Nil£650,000 £130,000 Nil£1m £270,000 £140,000£1.5m £470,000 £340,000£2m £670,000 £540,000

Please note tax rules are subject to change. The exact amount of tax payable will depend on individual circumstances.

SummaryChapter

1. Calculate your inheritance tax liability2. Start to consider your options3. Take appropriate action4. Periodically review your inheritance tax liability and

plans

Don’t IHT plan at the expense of your own financial security

Critically, before starting any inheritance tax plan, spending or gifting, look ahead to your own income and capital needs during your retirement and for the rest of your life. Take into account:

• What your spouse will need if you die before them• Inflation - rising prices will eat away at the value

of your savings• The possibility and potential costs of long term

care

There is a balance to be achieved between ensuring you have sufficient to live on and minimising both life and death taxes.

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A badly drafted Will can be worse than no Will at all, so be sure to consult a professional Will-drafter.

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How much inheritance tax might be paid?Therefore from April 2020, there is the potential for a married couple to leave £1 million of their estate IHT free to their direct descendants.

Important notes: The new main residence threshold only applies to one main residence property – not second homes, holiday homes, buy to let etc - and only then if it is left to a direct descendant (child, step-child, adopted child, foster child, or grandchild). The value of the main residence threshold tapers away where estates are worth £2 million or more.

Any unused main residence nil rate band can be transferred to a surviving spouse/civil partner where the surviving spouse/civil partner dies after 5 April 2017 regardless of when the first died.

Credit will be given where the deceased downsized to a less valuable residence, or ceased to own a residence, on or after 8 July 2015.

Estate planningEstate planning is the process which broadly ensures that the maximum amount of your assets, chattels and money, is distributed to

Single person (no transferable nil rate band) Inheritance tax liability

Value of home Value of other assets Value of estate Now From April 2020

£175,000 £150,000 £325,000.00 Nil Nil

£200,000 £300,000 £500,000.00 £70,000 Nil

£250,000 £400,000 £650,000.00 £130,000 £60,000

£400,000 £600,000 £1,000,000.00 £270,000 £200,000

£750,000 £750,000 £1,500,000.00 £470,000 £400,000

£1,000,000 £1,000,000 £2,000,000.00 £670,000 £600,000

Couple with full transferable nil rate band Inheritance tax liability

Value of family home Value of other assets Value of the estate Now From April 2020

£175,000 £150,000 £325,000.00 Nil Nil

£200,000 £300,000 £500,000.00 Nil Nil

£250,000 £400,000 £650,000.00 Nil Nil

£400,000 £600,000 £1,000,000.00 £140,000 Nil

£750,000 £750,000 £1,500,000.00 £340,000 £200,000

£1,000,000 £1,000,000 £2,000,000.00 £540,000 £400,000

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2.Wills & lasting powers of attorneyThe cornerstone of any succession plan is a formally drafted Will ensuring the right people benefit from your estate, in the right proportions, at the right time. A Will also makes the process of probate - the term commonly used to describe administering and distributing an estate after death - far easier. In the absence of a Will your estate becomes a hostage to the UK’s unwieldy intestacy laws which may be contrary to your wishes.

Steps to draw up a Will l Establish how much you are worth.

l Think about the people, organisations or charities you would like to benefit from your estate.

l Decide how to share out your estate. It is generally easier to divide your estate by proportions or percentages rather than fixed amounts. Consider separately any specific heirlooms that you might have, and to whom these will be passed. Any asset held jointly will normally automatically pass to the survivor.

l Decide who is going to be your executor(s) – these should be people that you feel confident can deal with your affairs and for couples will usually be the surviving partner plus one other. You can appoint a professional executor, usually a solicitor. This is particularly good if you have an extended family or if there might be anything contentious in your Will.

your beneficiaries. In simple terms, it involves reducing the amount of inheritance tax you pay, by minimising the size of your taxable estate (the value above the IHT threshold, £325,000) as 40% of this value is lost to the taxman on death. For every £100,000 you reduce your taxable estate by, you can save up to £40,000 in death duties.The best ways to reduce the taxable portion of an estate are to: 1. Spend capital or income, or both. 2. Give money away, either capital, or income, or both. 3. Invest in inheritance tax free investments. However the starting point is to ensure you have an up to date and professionally drafted Will in place.

Inheritable ISAs

Anyone who was married or in a civil partnership with someone who died on or after 3 December 2014 can now apply for an additional ISA allowance, known as the Additional Permitted Subscription (APS). The APS is equal to the value of the ISA held by the deceased on the date of death. Further details can be found here www.hl.co.uk/free-guides/what-happens-to-your-isas-when-you-die. Importantly, this does not save IHT, as transfers between spouses are IHT free already. However its an important consideration when writing your Will.

Where an investor held ISAs with several companies, a separate APS will be available from each. Please note any ISAs held lose their tax-efficient status on the date of death. Therefore any returns generated by the underlying investments after death could be taxable.

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l If your children are still dependent, decide who you would like to be their guardians.

Married couples often opt for “mirror” Wills, meaning both Wills leave their estates to each other. Some might choose to make specific gifts on the first death, (known as first death legacies) or gift the full value of their nil-rate band. This means on the first death an amount equal to the inheritance tax threshold, the nil rate band, is set aside into a trust. Prior to October 2007 this was commonly included in Wills to make best use of both inheritance tax thresholds. However this may no longer be necessary for inheritance tax mitigation as spouses are able to transfer their unused nil-rate bands (in other words their unused tax-free inheritance tax allowance) to each other, potentially doubling up on inheritance tax-free amounts.

Solicitors recommend that your Will is updated at least every five years or every time there is a change in your circumstances such as getting married or divorced. You also need to take account of changes in legislation over the years as well as new legal precedents.

Pension policies/schemesPension schemes are almost always dealt with separately from your estate as they are normally already written under trust. More details about pensions and their death benefits are on page 20.

Storing your WillOnce signed, most solicitors provide a Will storage service, often free. Alternatively keep your copy in

a safe place, and importantly tell your executors where you have put it.

Lasting powers of attorneyA Will ensures that your wishes are honoured after your death whereas a Lasting Power of Attorney (LPA) ensures that your wishes are carried out during your lifetime should you not be able to manage your affairs yourself. LPAs replaced Enduring Power of Attorney (EPA) in October 2007. If you have an EPA this is still valid.

Drawing up a Lasting Power of Attorney does not usually mean that someone has immediate powers to control your affairs. The LPA comes into force when you are no longer able to act for yourself. At the point of need, the LPA is registered with the Court of Protection and comes into force. Your Attorney will be able to help pay bills, organise nursing care and act for you in your interests.

The key point here is that it is someone chosen by you who can act immediately if you are unable to act yourself. In the absence of an LPA, your relatives have to apply to the Court of Protection which can take some time and be expensive to resolve. Even then the Court Official dealing with your affairs may change so your relatives may have to deal with different people over time.

You can appoint an LPA via a solicitor or do it yourself at www.gov.uk/power-of-attorney/overview.

SummaryChapter

1. Draw up your Will.2. Review your Will at least every 5 years.3. Draw up a Lasting Power of Attorney.

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3. Understand the options to reduce tax and maximise legacies

1. SpendingSpending capital can reduce the value of a taxable estate and save inheritance tax. Holidays, dining out and the theatre are all options, although if money is spent accumulating assets such as art or new cars, the value of the asset will remain in the estate. Therefore whilst an option, it is unlikely there will be significant IHT savings made by spending without a lifestyle change.

2. GiftingGiving money or assets to children is a great way to give them a good start in life. It could be the funding they need to go through university or the deposit for a house. At the same time, gifts can reduce the size of the estate and therefore the inheritance tax liability. It is possible to shrink the value of an estate and the inheritance tax bill considerably.

However, there are two main downsides of gifting:l Loss of control: The gift becomes the property

of the recipient. That means they can spend the money on fast cars and unsuitable relationships, if they want to.

l Loss of rights to the income or capital from the gift: Any gifts which retain rights lose the inheritance tax advantages of making the gift (this is known as ‘gift with a reservation of benefit’). For this reason care is needed not to be over-generous.

Before making a gift you should consider when and how you want the recipient to benefit. Most gifts are made direct, in cash or as an asset, so the recipient enjoys immediate benefit. The alternative is to consider using a trust which enables you to make a gift yet delay when the money is distributed. This allows you to stay in control of how and when money might be distributed (there is more about trusts in chapter 4).

Gifts and inheritance taxIt’s crucial to understand how inheritance tax is levied on your assets on death, but it may also apply to gifts made during your lifetime. From a tax perspective there are three main types of gift:

Exempt gifts - these are free from inheritance tax immediately.

Potentially exempt gifts - gifts which become exempt from inheritance tax over time.

Chargeable gifts - these may suffer an immediate charge to inheritance tax. The most common of these are transfers to a discretionary trust.

l Exempt gifts These gifts are free from inheritance tax

Exemption for married couples - married couples can transfer any amount of assets between themselves free of inheritance tax, either during their lifetime or on death.

SummaryChapter

1. Consider making the most of the annual gift exemptions.2. Consider how best to make the gifts; should beneficiaries receive the money immediately or at a later date?3. Once you have made a gift you cannot normally retain any benefits otherwise the gift fails.

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Annual exemptions - in each tax year, you can make a gift up to the annual exemption of £3,000 to a person(s) of your choice. On top of this, any unused exemption from the previous tax year can be carried forward to the present tax year but no further.

Gifts from income - you can make regular gifts out of income but you must show these gifts are made from your post-tax income; are habitual (though not necessarily annual); and leave you with sufficient income to maintain your standard of living. This substantial concession is widely under-utilised, particularly by those with higher incomes (see box left).

Marriage gifts - parents and grandparents can make one-off gifts on the marriage of children or grandchildren (up to £5,000 and £2,500 respectively).

Small gifts - in each tax year you can gift up to £250 to any number of people completely free of inheritance tax.

Donations to charities or political parties - gifts to these types of organisation, either during your lifetime or via your Will, are exempt from inheritance tax.

l Potentially Exempt Transfers (PETs) These gifts might be free from inheritance tax If a gift is not immediately exempt, it will usually be free from inheritance tax assuming the donor (the person making the gift) lives for at least seven years

Gifts from income

The normal expenditure from income exemption allows surplus income to be gifted without inheritance tax fears. Documenting these gifts is straightforward but important, HMRC IHT 403 (www.hmrc.gov.uk) is a useful guide and a simple letter of intention should also be used.

This income could be used:1. As a direct cash gift to help out day to day

expenditure or perhaps to reduce a mortgage.2. To invest for future school fees or university

costs.3. To fund a life assurance plan to save inheritance

tax (see page 14).4. As gifts into a trust, allowing inheritance tax

savings while retaining control over the assets (see section 4).

5. To fund a pension for children or grandchildren. Pensions enjoy tax relief on contributions as well as inheritance tax exemptions.

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from the date of the gift.

In theory, there is no limit to the value you may gift in this way, so a considerable sum (even the majority of a person’s assets) could be passed on via PETs.

Even if the donor does not survive the full seven years required by a PET, there can be a tax saving based on a sliding scale. Please note this taper relief does not apply to gifts which fall into your nil rate band.

When your estate is assessed for inheritance tax the gifts that you have made are counted against your nil rate band first, so these are subject to inheritance tax at 0% and no tax is paid.

The taper relief acts when the total of the gifts made exceeds the inheritance tax threshold. Taper relief reduces the impact of inheritance tax, see box to the right.

l Chargeable gifts These gifts may suffer an immediate charge to inheritance taxA chargeable gift is referred to as a non-exempt gift, since it does not fall into the categories of either exempt or potentially exempt. Gifts to a discretionary trust are the best example of chargeable gifts and may suffer an immediate charge to inheritance tax of 20%.

Generally, an immediate charge to tax only occurs if the total of non-exempt gifts made in a seven

year period exceeds the inheritance tax threshold (£325,000 for 2016/17). The rules surrounding this are complex and if this may apply to you we recommend you take advice, please call 0117 317 1690 for details of our inheritance tax planning services.

How taper relief worksNumber of years between gift and death

% of inheritance

tax

Effective rate of inheritance

taxLess than 3 years 100% 40%3 to 4 years 80% 32%4 to 5 years 60% 24%5 to 6 years 40% 16%6 to 7 years 20% 8%More than 7 years 0% 0%

Taper Relief Example

A gift of £400,000 is made 4 years before death. The first £325,000 absorbs the 2016/17 inheritance tax threshold and the remaining £75,000 is taxed, but enjoys taper relief. Therefore the tax is 60% of the full inheritance tax rate, the effective rate of tax being 24%, totalling an amount of £18,000. Importantly, it is the value of the gift which is assessed to tax, not what the value has become. For example, if your children were to invest a gift you made to them of £100,000, all of the interest, income and growth from the investment would be immediately outside of your estate and inheritance tax free. Only the value of the initial £100,000 gift is taxable for the first 7 years, after which it becomes inheritance tax free. Please note tax rules are subject to change.

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3. Inheritance tax exempt investments -business property relief (BPR)If held for at least two years, certain assets qualify for 100% ‘business property relief’ from inheritance tax. These assets can be held until death without triggering an inheritance tax liability. This provides an opportunity to invest and after two years the entire value is outside the estate for inheritance tax purposes.

This exemption was originally aimed at small business owners but also includes qualifying shares in unquoted trading companies, such as those listed on the junior market of the London Stock Exchange, the Alternative Investment Market (AIM).

It is therefore possible to transfer a family trading company, qualifying business, qualifying unquoted shares or qualifying AIM-listed shares to beneficiaries without incurring an inheritance tax bill. There is also no limit on the amount invested.

Companies which qualify for this relief, including those listed on AIM, tend to be smaller firms and their share prices are often volatile and illiquid. They therefore carry a higher degree of risk of losing money than other UK shares.

It is important to note that the qualification status for BPR is assessed at the date of death and may have changed since the date of investment.

AIM shares in ISAAIM shares can now be purchased in ISAs,

providing the potential for an IHT free ISA account.

Enterprise Investment Scheme (EIS)Qualifying EIS companies (which may be late-stage private unquoted firms or listed on AIM) enjoy similar inheritance tax breaks to qualifying AIM shares – inheritance tax free after two years of ownership.

This strategy comes with high risk because the companies they invest in are small and aiming for fast growth.

In addition to the inheritance tax breaks, EIS allow investors to defer capital gains tax, plus they can provide income tax relief worth as much as 30% of the first £1 million invested in each tax year. EIS must be held for at least three years to retain the income and capital gains tax reliefs.

Please remember these schemes usually involve taking much greater investment risks than a standard share portfolio or unit trusts. Liquidity is often poor which may mean you, or your executors, may not be able to cash in the investment when desired.

How do I know if business or AIM stock qualifies?

Business property relief is not available where the business mainly deals in land or buildings or the making or holding of investments.

SummaryChapter

1. Certain investments allow you to enjoy inheritance tax savings without giving up rights to the capital although the investment risks are generally high.

2. Generous tax reliefs provide tax planning opportunities.3. One long-term tax planning strategy is to invest in these types of scheme until death. Potentially this saves both

capital gains tax and inheritance tax.

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4. TrustsTrusts are an ancient legal concept dating back to times of the Crusades, when knights leaving England left their assets in the ‘trust’ of others, to be managed on their behalf until their return.

For most of us, trusts are mainly used to save tax. Assets can be passed into trusts as a “gift” and held or invested until such time as the trustees distribute money or assets to the beneficiaries. So the real advantage of many trusts is they offer all the inheritance tax savings of making direct gifts to the beneficiaries but with control retained. In brief:

1. You can retain control of the assets, so there is no need to worry about giving money to people who may not yet be in a position to use the proceeds sensibly.

2. The money remains invested as you choose and the growth, income or interest is usually immediately outside of your estate.

3. With some trusts you can change who benefits, when and by how much, as your family grows.

4. Unlike direct gifts, money held in a trust is normally protected from divorce or bankruptcy.

5. You can usually make full use of all your gifting allowances (as described in chapter 3) and make inheritance tax free gifts into trust.

6. You can start the 7 year clock ticking on any money paid into the trust over and above your

exempt gift allowances.

7. Gifts can be made into trust either on a one-off, ad hoc or regular basis.

Under normal circumstances, once a gift has been made into a trust, the investor cannot receive either an income or capital payments from the trust, otherwise the inheritance tax benefits of the gift fail.

However, there are various packaged investment schemes which use trusts aiming to provide “have your cake and eat it” benefits. In other words, gifts made to trust which enjoy inheritance tax savings but at the same time allow the investor to receive either income or capital. The most common of these are discounted gift trusts and loan trusts.

Discounted gift trusts (DGTs) A discounted gift trust is designed to provide some immediate inheritance tax savings together with a regular income for the investor. Here is how they work:

A gift, typically of £100,000 or more, is made into the trust and split into two parts.

l The first part is treated as a gift meaning the value normally falls outside of the estate after 7 years.

l The second part, the “discount”, is used to provide an income to the investor for life. Therefore HMRC normally deems it is immediately exempt from inheritance tax.

Make decisions based on the underlying merits of an investment, as well as the tax benefits. In other words, don’t let the “tax tail wag the investment dog”.

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Two popular trusts for investors

Bare trusts are the simplest type, usually set up for a child as beneficiary, and one or two adults acting as trustees. Bare trusts are also known as absolute trusts; the beneficiaries are nominated at outset and cannot be changed. Once a beneficiary reaches age 18, they have absolute entitlement to all the trust’s assets.

For these reasons bare trusts are more commonly used to save for children where the amounts invested are between £1,000 and £25,000 and the investor is happy for the proceeds to be paid at age 18.

Income and capital gains generated from the investments within a bare trust are generally treated for tax purposes as being received by the child. This means they can be offset against the child’s personal income and capital gains tax allowances. The result is usually no tax to pay.

However, you should avoid channelling gifts to a bare trust through parents. If income from bare trust investments set up by a parent exceeds £100 per child per annum, this income will be taxed on the parent. Any capital gains are taxed on the child.

One of the simplest ways to create a bare trust is through a fund supermarket such as HL Vantage. More details can be found on page 17 and in our Guide to Investing for Children. Please visit our website to request a copy.

Discretionary trusts work more effectively for investors saving for beneficiaries where the proceeds are not necessarily distributed at age 18. The advantage of a discretionary trust is the trustees have the “discretion” or power to pay the proceeds at whatever time or age the trustees see fit. The trustees also have the power to pay income or capital in whatever proportions they choose and can vary the amounts between beneficiaries.

This provides the trustees with much greater control and flexibility than a bare trust.

Discretionary trusts are more commonly used for larger investment amounts of £50,000 and above. If you plan to do this you should take advice.

Bare Trusts Discretionary Trusts1 2

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The proportions of the discount and gift elements are determined by the age and health of the investor. The longer the life expectancy the greater the amount of the discount, and the larger the immediate inheritance tax savings.

Loan trustLoan trusts are used to slow down the rate at which the value of an estate and the amount of inheritance tax rises. This is how it works:

You set up a trust, then loan an amount of money to the trust. The money is then invested. As this is a loan not a gift, you can demand repayment at any time. The amount of the loan is always an asset of your estate and chargeable to inheritance tax. However, all of the growth in the value of the investment in the trust is outside of your estate and therefore inheritance tax free.

The loan is normally set up interest free and repayments of the capital are commonly made on a regular basis to form an “income” stream.

Life insurance, pensions and trustsTo begin with, you should review your life insurance policies and where appropriate have the death benefits written under trust. By doing this, you ensure payouts completely bypass your estate and inheritance tax. Furthermore, the proceeds from a life insurance policy under trust are usually settled very quickly and before the administration of the estate is complete.

Normally pensions are already written under a trust and you should nominate your chosen

beneficiaries to confirm your wishes.

If your spouse does not need these death benefits, you can arrange to have them paid to another person, for example your children, or alternatively have them held in trust until they are older.

Life assurance to meet inheritance taxYou can reduce the impact of inheritance tax on the estate by using a life assurance policy written in trust (usually a ‘whole of life’ policy), the cost of which is funded by monthly premiums or by a one-off lump sum. The death benefit of the policy is used to meet all or part of the inheritance tax due, thus preserving the estate. For married couples, the policy is normally set up on a ‘joint-life, second-death’ basis, which means it pays out when both policyholders have died, as this is normally when the inheritance tax liability is due.

Insuring against inheritance tax isn’t as expensive as you might think and the premiums normally fall within annual exemptions or under the gifts from income exemption.

If you would like to consider investments of £100,000 or more to trusts or packaged inheritance tax schemes, or are interested in how life insurance can mitigate inheritance tax, please contact our Financial Advisers on 0117 317 1690 for details of our advisory services and to arrange a free initial consultation.

For more information please contact us on 0117 900 9000 or visit our website www.hl.co.uk

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SummaryChapter

1. Trusts allow you to make gifts, without the beneficiaries receiving immediate benefit. This puts you in control.2. The money can be invested so it grows - all the growth is normally inheritance tax free.3. Packaged investment products may provide inheritance tax savings with some benefit retained by the investor.4. Life insurance is a simple way of reducing the impact of inheritance tax on an estate.

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For more information please contact us on 0117 900 9000 or visit our website www.hl.co.uk

both at the same time. More details can be found at www.hl.co.uk/investment-services/junior-ISA.

Junior ISAsJunior ISAs are available to all children under the age of 18 who do not have a Child Trust Fund. For all intents and purposes the Junior ISA is exactly as described: a tax-efficient account for children with an overall annual limit of £4,080.

Unlike the CTF there will be no government contribution. Generally, Junior ISAs offer far more investment choice than CTFs. There are two types of Junior ISA:

• A Cash Junior ISA• A Stocks & Shares Junior ISA

5. Investing for childrenProviding children or grandchildren with a good start in life are often amongst the highest priorities and this can be combined with gifting and inheritance tax planning. As with all planning, the earlier you start the better. Please note taxes can change.

Child Trust FundChild Trust Funds (CTFs) have been replaced by Junior ISAs. Existing CTFs will continue, tax-free, until the child is aged 18. Additional contributions of up to £4,080 a year can still be added by family and friends.

CTFs can be transferred from one provider to another or to a Junior ISA, but a child cannot have

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Children can hold both types of Junior ISA at the same time as long as they don’t exceed the contribution limit per tax year. There is also the option to transfer from one Junior ISA provider to another.

Children will not be able to withdraw the capital from their Junior ISA before age 18. If monies are required before this age, perhaps for school fees, alternative savings schemes such as unit trusts under a designated account could be considered (see below).

Once sheltered in a Junior ISA the capital will not only be free of capital gains tax and further income tax, but also free of inheritance tax for those who have made the contributions, assuming the amount of the gift falls within normal inheritance tax gift exemptions.

Designated accounts and bare trustsIndividual shares and unit trusts cannot normally be bought directly by a child and are usually held in a designated account.

Bare Trusts are the simplest type of trusts and are created when you make a gift into a designated investment account with the intention of creating a trust arrangement. The child is the beneficiary and becomes automatically entitled to the investments at 18.

However, as a trustee, you may be able to distribute money at an earlier age if you need to, for example to meet school fees. In the majority of cases any tax liabilities fall on the child but in

Investing for othersIt is also possible to pay into an existing ISA or pension for another adult, providing the total contributions do not exceed subscription allowances.

practice there is usually none to pay.

Pensions for children (Junior SIPP)It has been possible to pay into a pension for your children or grandchildren since April 2001, therefore giving them a great start to their own retirement plans. The contribution enjoys tax relief as normal at 20% so a £3,600 contribution costs just £2,880. The funds grow free from capital gains tax and almost free of income tax, so they grow faster than comparable taxable investments.

Our Investors’ Guide to Saving for Children has more details of these schemes and any tax implications.

SummaryChapter

1. Investing for children helps give them a good start in life and can save IHT at the same time2. Junior ISA is a popular tax efficient savings and investment account for children3. Child Trust Funds can now be transferred into Junior ISA4. Bare trusts may work for larger investments or where money is needed for school fees5. Junior pensions can provide a great start for a child’s retirement

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6. Charitable givingThere are a number of tax breaks available to encourage charitable giving both during lifetime and via a Will upon death. The first and most important is that all gifts to registered charities are free of inheritance tax. Therefore gifts to charity can substantially reduce the taxable proportion of an estate and save considerable amounts of tax, whilst supporting your favourite charities.

1. Charitable giving to reduce the rate of IHT during lifetime

Gifts of cash to registered charities and community amateur sports clubs are free from IHT. Income tax relief may also be available on the gift through Gift Aid or Payroll Giving.

• Gift Aid: income tax relief of £25 is added to every £100 gift making a total of £125 for the charity. Higher and additional rate taxpayers can reclaim further tax relief via their self assessment tax codes.

• Payroll giving: gifts made through payroll as part of a payroll giving scheme attract income tax relief. A £100 donation costs a basic rate taxpayer £80, a higher rate taxpayer £60 and an additional rate taxpayer £55. More details available at www.gov.uk/donating-to-charity

2. Giving shares, land or property to charity

Gifts of property, land or shares to charity can be highly tax efficient as they benefit from additional tax reliefs over and above an IHT exemption. There are two ways in which this can be done:

• A direct gift of the asset. If shares, land or property are gifted to a charity there is no IHT consequence to worry about. Furthermore, there is no capital gains tax (CGT) to pay, the charity receives the value of the asset tax free and there are no tax consequences for the investor. Gifting an asset to charity often works well where there is a large, taxable capital gain.

• Sell the asset and then gift the cash: If shares, land or property are sold and then the value gifted, capital gains tax may be payable if the asset has increased in value. However, Gift Aid should also be available on the value of the

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money gifted. Therefore, selling the asset before gifting the proceeds works well where the capital gain is small, within the annual capital gains tax exemption, or where there are losses which can be offset against other gains, or the value of the Gift Aid will outweigh any CGT liability.

3. Charitable giving to reduce the rate of IHT upon death

Certain charitable legacies written into a Will reduces the rate of inheritance tax paid on the estate on death. If 10% of an estate is left to a registered charity (after allowing for the inheritance tax threshold and other reliefs) the rate of inheritance tax is reduced from 40% to 36%. This applies to all deaths on or after 6th April 2012.

For example:Without charitable legaciesEstate £900,000Nil rate band (£325,000)Taxable estate £575,000

IHT @ 40% of taxable estate £230,000Net estate for distribution £670,000

With Charitable legaciesEstate £900,000Gifts to registered charities (£75,000)Nil rate band (£325,000)Taxable estate £500,000

IHT @ 36% of taxable estate: £180,000

Charitable gifts £75,000Net estate for distribution £645,000

As can be seen, the gifts to charity do not increase the legacies for distribution; they reduce the amount of tax paid in favour of the charities.

4. Setting up your own charitable trust

Setting up your own charitable trust is not as complicated or administratively onerous as might be expected and may appeal to those who cannot find an existing charity which meets their requirements. The steps are as follows:

• Choose your charitable purpose • Establish the trust deed• Register the charitable trust• Set up the trust’s investment or savings

accounts• Make donations to the trust• Construct your portfolio

The Charity Commission has excellent, simple guidance and model trust deeds https://www.gov.uk/government/organisations/charity-commission

Vantage charitable trust fund and share accountsCharitable trusts can set up fund and share accounts within HL Vantage for the charity’s investments. Investors can also transfer shares or funds from into the charitable trust Vantage account as a gift if they wish. For more details call 0117 980 9863.

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The death benefits of a pension depend upon many factors including the scheme rules, whether the benefits are in payment and the age at death. Normally pension death benefits are inheritance tax free. Final salary and defined benefit pensions usually pay a widow(er)’s pension which is taxed as income. Sometimes they pay a dependants’ pension as well. If death occurs during employment, they might also pay a tax-free lump sum. The scheme booklet or administrators will have the details.

With personal pensions, stakeholder pensions, self-invested personal pensions (SIPPs) and income drawdown plans, up until age 75, the value of the fund is normally paid to the estate or nominated beneficiary free of any tax, providing the total value of pension benefits is less than the Lifetime Allowance (£1.25 million for 2015/16 falling to £1 million from April 2016). For death after age 75, income or lump sums payable to beneficiaries are subject to income tax at their highest marginal rate.

Many people still use some or all of their pension fund to buy an annuity to secure income in retirement. The death benefit from an annuity depends upon the type of annuity arranged at the outset. Commonly there are widow(er)’s benefits or guaranteed minimum payment periods, which are not subject to IHT but are subject to income tax. Those annuities without these options stop paying income upon the death of the annuitant. This is why it is important to shop around and make an informed decision. Visit www.hl.co.uk/annuities for more information

Pension death benefits

on annuity options.

Importance of nominating your beneficiairesPersonal pensions, SIPPs and income drawdown plans are almost always written under a master trust. This means that the death benefits are separate from your estate and Will, and normally IHT free. Investors should complete a nomination of beneficiary form to provide the trustees with their instructions to whom money should be paid in the event of death. Ultimately it is the trustees of the pension, not the investor, who decides who receives the value of the pension pot, although in practice, the beneficiary nomination is followed the vast majority of the time.

To order a copy please go to www.hl.co.uk/free-guides or call 0117 980 9926.

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Unsure which inheritance tax plan to choose?Use this guide to help

Surplus income

Surplus capital

Capital available but not for outright gifts

The options include

The options include

The options include

Make direct gifts (see p8)

Make direct gifts (see p8)

Loan trust (see p14)

Make gifts to Child Trust Fund, Junior ISA or Junior SIPP (see p16)

Make gifts to adult ISAs or pensions (see p17)

Make gifts to Child Trust Fund, Junior ISA or Junior SIPP (see p16)

Make gifts to adult ISAs or pensions (see p17)

Discounted gift trust (see p14)

Make gifts into trust (see p12)

Make gifts into trust (see p12)

Inheritance tax efficient investments (see p11)

Use income to fund a life insurance plan to meet the inheritance tax (see p14)

Tax rules, and reliefs from tax, are subject to change. The exact benefit will depend on your circumstances. It is therefore wise to monitor your plans to make sure they are effective. This guide is not personal advice. Should you have any doubts you should seek advice.

Spend (see p8)

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Q. Can I give my home to my children and still live in it, inheritance tax free, if I pay a rent to them?

A. In principle yes, providing the leasing of the property is arranged on commercial terms. A formal lease/tenancy agreement is wise in these circumstances. It is important to bear in mind:

l The property will no longer be yours: your children could sell at any time or the property could become part of a future divorce agreement

l The property will become an investment belonging to your children and subject to capital gains tax on the growth in value and income tax on the rent you pay them

l Giving your home to your children will normally be a potentially exempt transfer (see page 6) and will not be inheritance tax free for 7 years

HMRC and the Capital Taxes Office dislike inheritance tax saving schemes that involve the family home and these are likely to be subject to the greatest scrutiny. If you try any inheritance tax planning that involves the family home, you should work on the basis there is no guarantee of success.

Q. Why do I have to record gifts?

A. The principle of self assessment is you should always declare your tax affairs fairly and honestly. When HMRC challenge a tax return or probate, they work on the basis of ‘guilty until proven

Frequently asked questions

innocent’ – the onus is on the executors to prove what has been done. Therefore if your executors do not have clear documentation of your gifts or other inheritance tax plans, inheritance tax will be paid.

Q. How would a professional review my inheritance tax situation?

A. The first step is to calculate the potential liability and when this might fall due. Therefore they would require full details of your financial circumstances and a copy of your Will. Next would be to ensure that you had sufficient income and capital to meet your own needs and requirements. Then the adviser would consider the options available to you to reduce the taxable value of your estate: gifting; use of trusts; life insurance etc. before making specific recommendations. Reducing IHT often uses more than one strategy.

Q. When is the best time to start inheritance tax planning?

A. This depends upon a number of factors including the size of the estate, the amount of the liability and when it falls due.

The majority of investors accumulate assets during their working lives. At retirement, assets are converted from growth to income to supplement pensions. Therefore it makes sense for investors to take stock and review their inheritance tax position at or shortly after retirement or upon receipt of a windfall.

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Q. How often should I review my inheritance tax plans?

A. Generally speaking you should review your gifting strategy once a year, since there are various annual exemptions which can be used. Therefore it makes sense to review your inheritance tax plans at the same time. For investment based plans you should review how they are doing not less than annually.

Q. What are the tax implications of passing my inheritance onto my children?

A. If you gift all or part of an inheritance you receive onto your children it is treated as being made by you and is subject to normal gift rules (see page 8). There could therefore be an inheritance tax liability. However, it is possible to alter a Will after death in order to avoid inheritance tax. By creating a ‘deed of variation’, the beneficiaries of a Will can agree to change a deceased’s instructions in order to distribute assets in an inheritance tax-efficient manner. For example, having the legacy paid directly to your children rather than you. This has to be arranged within 2 years of death. Please note tax rules are subject to change and Budget 2015 announced a review of deeds of variation which could lead to their abolition.

HL Financial AdvisersA free no-obligation consultation

Our Financial Advisers can offer professional financial advice when you’re facing important decisions or a departure from your normal situation. Receiving an inheritance, tackling the issue of inheritance tax, paying for long-term care or recognising you no longer have the time or inclination to manage your own affairs are just a few examples.

To discuss your needs and find out more about our advisory services please contact our Advisory Helpdesk on 0117 317 1690 (Mon-Fri 8.30am – 6pm) for a free consultation. There is no obligation to proceed. If you could do your own planning without advice we will give you the resources and support you need to do so. However, if you decide that personal advice would be valuable we will arrange for a Financial Adviser to contact you directly.

Please call 0117 317 1690 for your free consultation or for more information go to www.hl.co.uk/advice

For more information please contact us on 0117 900 9000 or visit our website www.hl.co.uk

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0117 900 9000www.hl.co.uk

Useful telephone numbers

For queries about:ISAs, Unit Trusts, OEICs, Index Trackers, Investment Bonds,

Investment Trusts, VCTs & EISsPlease call our Helpdesk on 0117 900 9000

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Please call our Helpdesk on 0117 900 9000

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Company Pensions, Annuities, DrawdownPlease call our Pensions Helpdesk on 0117 980 9926

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Please call our Advisory Helpdesk on 0117 317 1690

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