A Guide To INHERITANCE TAX - St James's Place

A Guide to
INHERITANCE TAX
PARTNERS IN MANAGING YOUR WEALTH

Contents
Inheritance Tax – some facts 3
Inheritance Tax – what it means to you 5
What to do about Inheritance Tax 7
Your Will 8
Using trusts 9
Gifting 10
Tax efficient funds 11
Pensions and life assurance 12
Summary 13
About St. James’s Place 14

Inheritance Tax – some facts
Whether we like it or not the inescapable fact is that, one
day, we are all going to die.
And unless we are very careful our families could end
up, like many people before them, paying a sum to Her
Majesty’s Revenue and Customs (HMRC) in Inheritance
Tax (IHT).
There was a time when IHT was solely the concern of the
very wealthy, however the value of residential property
now means that this is no longer the case.

An estate will be subject to IHT if, on death, it exceeds
the individual Nil Rate Band. The Government has
announced that the Nil Rate Band will be £325,000 until
at least 2014/2015. Since October 2007, it has also been
possible to use any unused proportion of a Nil Rate Band
from a deceased spouse or registered civil partner.
Inheritance Tax revenue raised in 2010/11 by the
Government was calculated by Her Majesty’s Revenue &
Customs (HMRC) to be £2.7 billion * .
Source
*
HMRC

Inheritance Tax what it
means to you
IHT is affecting a rapidly growing number of people, most
of whom would prefer their hard-earned assets to pass to
their families when they die.
Yet a large proportion of their wealth or estate, including
the family home, investments, insurance policies not in
trust or even family heirlooms, might have to be sold in
order to meet the IHT liability on death if proper steps
have not been taken to protect their wealth.
Don’t assume that moving or living abroad will get
you off the hook either. Your overseas assets, such as a
second home, continue to be liable to IHT if you remain
domiciled in the UK. If you move abroad, UK-based
assets are likely to remain taxable and even if you die
several years later, HMRC may still be able to argue that
worldwide assets are assessable for IHT. This is because
it is only your ‘domicile’ that is relevant for UK IHT.
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PARTNERS IN MANAGING YOUR WEALTH

By living abroad for a few years, you may have become ‘nonresident’
but the UK tax authorities may still regard you as a
‘UK-domicile’. Although you can take steps to demonstrate
you have changed your ‘domicile’, HMRC is unlikely to
confi rm that this has been achieved until you have died, so
careful contingency planning is always advisable.
Your domicile is typically influenced by the domicile
of your parents but also your place of birth and where
you have been brought up. You can change domicile by
moving permanently abroad, but to achieve this you would
effectively need to sever all ties with the UK, such as
ceasing to own a UK property or belonging to a UK club.
So how do you determine your IHT exposure?
The calculation is often, although not always, simple.
Broadly, you count up the value of all the assets remaining
on death, subtract the Nil Rate Band and what is left is
taxed at 40%. If your spouse dies before you without fully
using their Nil Rate Band the proportion of the unused
amount can be carried forward to use on your death.
However it is still legally possible to ensure that as much
of your estate as possible stays out of HMRC’s grasp –
and that can be done by seeking specialist, professional
advice. Careful IHT planning is all about passing as
much of the proceeds of an estate as possible to chosen
beneficiaries rather than to HMRC. It is also about
maintaining flexibility and control over any arrangements
that are made.
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PARTNERS IN MANAGING YOUR WEALTH

What to do about
Inheritance Tax
The first step is to decide to do something and then to do
it. Planning may include:
• Drawing up a Will and ensuring it properly expresses
your wishes and is planned correctly to save the
maximum amount of tax.
• Transferring assets through the prudent use of
lifetime gifts.
• Creating an IHT-efficient fund to enable beneficiaries
of an estate to meet the tax liability without
disturbing family wealth.

Your Will
A Will is vital in helping, among other things, to mitigate
IHT. Failure to make one sees your assets distributed
according to intestacy rules. Furthermore, do not
assume that a Will made many years ago is still going
to hold good. Wills need to be reviewed on a regular
basis and especially after any changes in your financial
circumstances, such as divorce or the birth of a child,
not to mention a plethora of legislative changes. Unless
specifically written in contemplation of marriage, a Will
written before a marriage will become invalid following
the marriage. A carefully drafted Will can give you the
opportunity to ensure that your estate passes to the
beneficiaries in a tax-efficient manner and ensures that
your assets are directed as you see fit.
By directing assets to your spouse/civil partner on death,
your individual Nil Rate Band remains unused but can
be carried forward for use in the future. However, by
passing (via your Will) an amount equal to the prevailing
Nil Rate Band to a trust arrangement on your death, it
is possible for you to still achieve significant IHT savings
whilst preserving the financial security of your spouse/
civil partner. Further information can be obtained from a
professional adviser.
Will writing should only be conducted by experienced
legal practitioners and is a separate and distinct
service provided by third parties with whom we work.
Wills and trusts are not regulated by the Financial
Services Authority.
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PARTNERS IN MANAGING YOUR WEALTH

Using trusts
A suitably worded trust is the cornerstone of good IHT
planning. A trust is where an individual (the settlor)
transfers a legal obligation to a binding person (the
trustee) to deal with property in a particular way for the
benefit of one or more beneficiaries. The objectives of the
person owning the estate will dictate the type of trust
that might be used to pass on assets. However, the reasons
for setting up a trust can be greater than just IHT and
might include:
• Provision of monies for successive generations
• Preservation of monies which may be diluted due
to divorce, meeting the cost of long term care or
bankruptcy
• Income Tax and/or Capital Gains Tax (CGT)
mitigation
• Providing a gift to a child but remaining in control
of it until they are suitably responsible.
Trusts are not regulated by the Financial Services Authority.
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PARTNERS IN MANAGING YOUR WEALTH

Gifting
Gifting is an effective way of reducing your IHT bill, as
it removes assets from your estate before your death. In
order to qualify, gift making must be handled carefully
and without strings. For example, if you were to continue
to benefit from assets gifted away, they are likely to be
regarded as ‘gifts with reservation’ and as a result fall
back within your estate for the purposes of IHT.
Gifting falls into three main categories:
1. Exempt transfers, where the gift becomes exempt
from IHT on death. Examples might be transfers
between spouses, civil partnerships or gifts to charity,
or those which make use of gifting allowances.
2. Potentially exempt transfers, where exemption is
achieved if the gift is given seven years before death.
Gifts given less than seven years from death may
benefit from varying levels of relief.
3. Chargeable lifetime transfers are gifts which are
generally made into most types of trust which become
immediately subject to IHT, where the gift exceeds
the Nil Rate Band, but only at a rate of 20% when paid
by the Trustees or 25% when paid by the Settlor.
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PARTNERS IN MANAGING YOUR WEALTH

Tax efficient funds
The Alternative Investment Market (AIM) and small
businesses provide an opportunity for people looking to
minimise their IHT liability.
Both allow investors to tackle IHT without losing access
to, and ownership of, capital. Investing in shares quoted in
AIM or small businesses provides IHT freedom after only
two years, and in the case of investment in small businesses
through an Enterprise Investment Scheme (EIS) it may
also be possible to reduce an income tax or CGT bill.
For many investors, the decision to invest in AIMquoted
shares or an EIS is motivated by the significant
tax advantages provided. You should bear in mind that
the bases of taxation and reliefs from taxation can change
at any time as they are subject to changes in legislation.
However, investment in this market does require specialist
advice and so a professional adviser should be consulted.

Pensions and life assurance
Pensions and life assurance plans can also be of great
benefit in reducing an IHT liability. Death benefits in
modern pension plans are broadly exempt from IHT and
provide retirement income for the spouse or civil partner.
Whilst investment in a pension is therefore an indirect
method of mitigating IHT, it is crucial that the supporting
trusts are in place for funds to pass to the beneficiary.
Life assurance plans are uniquely placed to provide a taxfree
cash sum to meet any IHT liability, but because they
may also form part of your estate or that of your survivor,
they should normally be written in trust. Under these
circumstances contributions to the life assurance plan
will be transfers of value, but will generally fall within
the normal expenditure out of income exemption or the
annual exemption.

Summary
It is better to do something sooner rather than later to
ensure your heirs don’t have to face an unnecessarily
large IHT bill when you die. With careful planning and an
effective Will, you can help save IHT by making the most
of the various tax reliefs and other strategies available.

About St. James’s Place
At St. James’s Place Wealth Management we offer a wide
range of high quality wealth management services to both
individuals and businesses.
At the heart of the business is the St. James’s Place
Partnership, a group of some of the most experienced,
able and highly regarded professionals working in wealth
management today. They are solely responsible for
delivering the St. James’s Place Wealth Management
service to clients. Members of the St. James’s Place
Partnership have on average 17 years’ experience in
the industry and build long-term relationships founded
on trust.
Your personal Wealth Management Service
The essence of our business is to help make it easier and
simpler for you to manage your wealth, and we achieve
this through the provision of personal, face-to-face
wealth management advice that is designed to suit your
individual long-term requirements. We can help address
straightforward issues and resolve more complex multifaceted
problems. Basing our service on this principle,
our Partners have built exceptionally strong, trusted and
lasting relationships with our clients.
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PARTNERS IN MANAGING YOUR WEALTH

We do not believe in off-the-shelf solutions, and our
Partners know that every single client has their own
unique personal concerns, responsibilities and ambitions.
The solutions that work for one, simply would not work
for another. This is why all our advice is face-to-face and
focused on the personal needs of each individual client.
Your St. James’s Place Partner will work closely with you
to offer protection solutions that are specifically tailored
to you.
Our Guarantee
St. James’s Place Wealth Management guarantees the
advice given by its representatives when recommending
any of the products or services provided by companies
within the Group.
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PARTNERS IN MANAGING YOUR WEALTH

UK members of the St. James’s Place Wealth Management Group are authorised and regulated by the Financial Services Authority.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
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