UK News: How will you pass on your wealth to the next generation?

Passing on wealth to the next generation is one of the most important yet challenging aspects of Financial Planning. Research indicates that many families do not transition their assets as successfully or efficiently as they intend to. In this article, we consider three principal strategies that we regularly discuss to address Inheritance Tax (IHT) planning requirements.

1. Asset reduction – gifting of assets during your lifetime (and receiving no further benefit from any asset gifted)

One of the most effective ways to reduce the value of an estate, and therefore its exposure to IHT, is to gift assets. So long as the individual making the gift survives for seven years from the date on which the gift was made, and receives no further benefit from it, it is not subject to IHT. If the gift is classified as being from surplus income, it is (currently) immediately exempt.

Before gifting an asset, consideration should be given to the following:

  • Any potential liability to Capital Gains Tax (CGT), since the gifting of certain assets constitutes a disposal for CGT purposes. Prior to any gift being made, the CGT treatment should always be clarified with your tax advisor.
  • That there is no reservation of benefit when a gift is made, since if there is, it may be treated as never having occurred. This means that you cannot continue to enjoy the benefit of an asset after you have gifted it as this would render it within your estate for IHT purposes.

Should you prefer to retain a degree of control over the assets you are prepared to give away, a Trust can be an effective alternative to an outright gift. Trusts can be used to ensure that family assets are not misused. They can also provide a degree of discretion as to how both future capital and income distributions are dispersed. Trusts can be created either during your lifetime or through making the relevant provision in your will. Advice should always be taken prior to transferring assets to a Trust during an individual’s lifetime, since such a transfer may trigger the lifetime charge to IHT of 20 per cent.

2. Asset Freezing – locking in the current value of what you have and gifting the potential future increases in value

For assets that are likely to increase significantly in value over time, such as real estate or equities, it is possible to ensure that future increases in value fall outside of your estate. The simplest example of asset freezing is a loan. A loan freezes the value of the monies lent from the lender’s estate and, provided the borrower invests the monies, allows any future capital growth to accrue outside the estate of the lender and within the estate of the borrower. To ensure that making the loan does not itself give rise to an IHT charge, the loan is usually expressed to be interest free and repayable on demand.

Asset freezing can be effective should you believe that you have accrued sufficient wealth to provide for yourself, but you are reluctant to part completely with a large part of your estate. An integrated approach, involving both asset reduction and asset freezing, is sensible.

Typical structures employed to hold the capital growth are Trusts or Investment Companies, such as Family Investment Companies (FICs). Control over the direction of the growth can be achieved by specifying in the Trust deed how the accumulated funds are to be distributed. It can also be specified in the company structure through the formation documents and shareholders agreements, with decisions as to when funds should be paid out resting with the directors rather than the shareholders.

3. Asset Conversion – converting the assets currently owned which do not qualify for IHT relief into assets that qualify for a specific IHT relief

Asset Conversion involves converting assets which do not qualify for any form of IHT relief into assets which do (for example agricultural or business property). The intention of this is to reduce the value of the assets when calculating the IHT liability.

Certain assets which qualify for IHT relief can be transferred to vehicles such as Trusts – without the usual lifetime charge to IHT (20 per cent). As noted above, Trusts can be used to ensure that payments are only made in certain circumstances and to provide a framework for family members and beneficiaries, when managing wealth.

Advice should always be taken prior to transferring assets to a Trust.

Insurance

In addition to the strategies highlighted above, if you are concerned about the impact of IHT on your estate, you may also wish to consider using life assurance as a means of providing your beneficiaries with funds to enable them to meet any IHT liability.

Life assurance can also be used as a means of providing your selected beneficiaries with liquidity.

Our services

Whether you have a well formulated plan, which you would simply like us to help you execute, or if you have not yet started to consider your Estate Planning strategy, we can assist you in assessing your options and building a plan that meets your needs. We will review your existing arrangements, discuss your objectives and undertake rigorous analysis such as stress testing your ability to transition wealth, whilst maintaining your desired lifestyle.

Why not contact your Relationship Manager or Investment Counsellor to arrange a meeting to see how our Strategic Financial Planning Specialists might be able to address your Estate Planning needs?

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