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More people than ever before are paying inheritance tax due to a steady increase in house prices.

HMRC revenue figures show that the amount of inheritance tax paid has increased every year since 2009/10.  It is thought that around 1 in 20 families now pay inheritance tax.  Most people don’t realise that the value of their estate above the inheritance tax threshold will be taxed at 40%.  There are however a number of planning tools that can be used now to avoid your family paying unnecessary inheritance tax on death.

Create a Trust

Creating a Discretionary Trust allows you to pass money or property down to the next generation but allows you to control how and when they can access income and/or capital. A Trust also protects the assets if you are worried your children may divorce at some point, get in to financial difficulty or just aren’t ready to manage significant sums of money. As long as you survive 7 years, the value of the asset or money you transfer in to the Trust, won’t form part of your estate for Inheritance tax purposes. You can transfer up to £325,000 in to a Trust without paying any immediate tax charge. Whilst the asset you place in to the Trust is effectively no longer yours, you can still appoint yourself as a Trustee. It is the Trustees who then exercise their discretion in making any payments out of the Trust. Setting up a Discretionary Trust is a great way to pass assets down to your children and grandchildren without giving up complete control, however it does require expert legal advice. Our experienced private client lawyers can assist you, providing you with professional and pragmatic advice to allow you to prepare for the future.

Review your Pension

Many people know that they have a pension in place and are making monthly contributions towards their pension, however most people do not understand what will happen to their pension on death nor the tax consequences of doing something or doing nothing.

What happens to a pension on death depends on the type of pension the individual has. Some pension companies may not make any further payments after death however for those that do, it is worth checking that firstly, there is a nomination form in place and secondly, the form reflects your current wishes. If your pension was set up years ago and you are no longer with your spouse there are considerations you should make, for example, have you checked you have changed your nomination form? If you haven’t included someone in your nomination form, they cannot be a beneficiary of your pension pot. This could ultimately result in your children missing out on a tax-free pot of money.

The idea behind pensions are that they should not form part of your estate on death and therefore are not subject to inheritance tax making them useful inheritance tax planning tools. You could potentially save inheritance tax by leaving your pension untouched and funding your retirement with other assets such as taking an income from your ISA, cash savings or other investments.

Whilst we as solicitors can’t advise you on your pension, we always recommend that you speak to a financial advisor to ensure that your pension will pass down to the intended beneficiaries and is not subject to any unnecessary tax. The importance of this was highlighted in a recent case in December.

Shortly before her death Mrs X opted to transfer funds out of a pension scheme that she had received as part of a divorce settlement to a personal pension plan. Under her new pension plan she nominated her sons as her beneficiaries in relation to the death benefit. She chose not to take any retirement benefit from the new pension plan and at the date of her death the whole of her pension fund was uncrystallised. HM Revenue & Customs served the deceased’s executors notices of determination assessing them for inheritance tax on the basis that the transfer of funds between the pension plans and the omission to draw any benefits from the new pension plan were dispositions that were transfers of value in her sons’ favour. The court of appeal found in favour of HM Revenue & Customs and deemed that the value of her pension was liable to inheritance tax.

Make Gifts

You can also start to make gifts now to your family that are exempt. Gifts of up to £3000 a year are allowed under the annual gifting allowance. You can also make an unlimited number of individual gifts of up to £250. Other gifts are allowed, for example, to a child who is getting married. Gifts out of income are also permissible provided they meet specific criteria. It is important to keep an accurate record of any gifts made and get advice first.

Check if Your Business Qualifies for Tax Relief

Certain assets are subject to inheritance tax reliefs such as Agricultural Property or certain shares in companies. The criteria is strict however and you should speak to your accountant and solicitor to find out if your business qualifies.

Contact our Private Client Solicitors in Ayrshire and Dumfries and Galloway

It is a mistake to think inheritance tax only affects the rich. If you own property, have a private pension and particularly, if you are a business owner, your estate may be over the inheritance tax threshold.

If you are concerned about the amount of tax that may be payable on your estate when the time comes, our trust team of private client solicitors are here to discuss your options with you, whatever your circumstances. Call us today on 01292 388048 or fill out our online enquiry form and one of the team will be in contact with you.

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