Ellis Bates Financial Advisers
Head of Estate Planning and Chartered Financial Planner, Mark Chandler, outlines our tax planning services and inheritance tax planning services including making a Will, trusts and probate.
Time for a tax health check?With the current tax year having begun on 6 April 2022, the clock is ticking and it is important to utilise all the tax reliefs and allowances available to you before 5 April 2023 in order to minimise any potential liabilities.
Personal tax planning should be at the top of your agenda as the end of the current tax year is not too far away. Taking action now may give you the opportunity to take advantage of any remaining reliefs, allowances and exemptions.
At the same time, you should be considering whether there are any planning opportunities that you need to consider either for this tax year or for your long-term future. We’ve listed a few reminders of the issues you may want to consider as worthy of including in your 2022/23 tax health check to-do list.
Married couples should consider utilising each person’s personal reliefs, as well as their starting and basic rate tax bands. Could you make gifts of income-producing assets (which must be outright and unconditional) to distribute income more evenly between you both?
This is an especially tax-efficient way for you to make pension contributions, to save and reduce your Income Tax and National Insurance.
Have you considered exchanging part of your salary for payments into an approved share scheme or additional pension contributions?
Unless you are an additional rate taxpayer or have already accessed pension benefits then you are entitled to make up to £40,000 of pension contributions per tax year. Have you fully utilised your tax-efficient contributions for this tax year or any unused allowances from the three previous tax years?
A stakeholder pension is available to any United Kingdom resident under the age of 75. Children can also make annual net contributions of £2,880 per year, making the gross amount £3,600 regardless of any earnings. It is also a very beneficial way of giving children or grandchildren a helping hand for the future. Is this an option you or a family member should be utilising?
The Pension Lifetime Allowance (LTA) is currently £1,073,100 and has been frozen at this level until the 2025/26 tax year. The maximum you can pay in is £40,000 per annum unless you pay tax at 45% in which case the annual limit could be as low as £4,000. Inflationary increases by the end of the current tax year could also have an impact on your pension funds. Do you have a plan in place to protect your money from this?
If your are 55 or over you could access 25% tax-free cash from your Defined Contribution (also known as Money Purchase) pension pots and invest the rest. However, drawing large amounts in one tax year can lead to a larger tax bill than if spread over a longer period. Do you know the implications of taking money out of your pension pots?
Usually called a ‘spousal by-pass trust’, although the recipient may not always be a spouse, this is a discretionary trust set up by the pension scheme member or pension holder to receive pension death benefits. Are your pension death benefits written in trust?
An ISA allows you to save and invest tax-efficiently into a cash savings or investment account. The proceeds are shielded from Income Tax,
tax on dividends and Capital Gains Tax. The government puts a cap on how much you can put into your ISA or ISAs in any tax year (from 6 April to 5 April). The ISA allowance for 2022/23 is set at £20,000. Have you fully utilised the maximum annual allowance?
This is a long-term tax-efficient savings account set up by a parent or guardian, specifically for the child’s future. Only the child can access the money, and only once they turn 18. Have you invested the maximum £9,000 allowance for your child or children?
The Lifetime ISA (LISA) is a tax-efficient savings or investments account designed to help those aged 18 to 39 at the time of opening to buy their first home or save for retirement. The government will provide a 25% bonus on the money invested, up to a maximum of £1,000 per year. You can save up to £4,000 a year, and can continue to pay into it until you reach age 50. Could you be taking advantage of this very tax-efficient option?
There are two different rates of CGT – one for property and one for other assets. If your assets are owned jointly with another person, you could use both of your allowances, which can effectively double the amount you can make before CGT is payable. If you are married or in a registered civil partnership, you are free to transfer assets to each other without any CGT being charged. It is currently £12,300 but will be reduced to £6,000 from 6 April 2023 and £3,000 from 6 April 2024. Have you fully used your current £12,300 annual exemption?
IHT must be paid on the value of any estate above £325,000, or up to £1 million for married couples including the residence nil-rate band). However, certain business assets, including some types of shares and farmland, in private trading companies can qualify for 100% relief from IHT. The government has frozen the IHT thresholds for two more years to April 2028. Are you taking advantage of the reliefs available to you?
This allowance was introduced during the 2017/18 tax year and is available when a main residence is passed on death to a direct descendant. The allowance is currently £175,000. When combined with the nil-rate band of £325,000, this provides a total IHT exemption of £500,000 per person, or £1 million per married couple. If you are planning to give away your home to your children or grandchildren (including adopted, foster and stepchildren) the RNRB must be claimed. There is a form for this purpose – IHT435. The form is available on the Gov.uk website. If applicable, have you applied for the RNRB?
If you leave at least 10% of your net estate to charity a reduced inheritance rate of 36% applies rather than the usual 40%. Other exemptions apply for inter-spousal transfers, transfers of unused annual income, business and agricultural assets, and for various other fixed, small amounts. Are you intending to make gifts before the end of the current tax year?
These help protect your assets and guarantee that your loved ones have financial stability for their future. Crucially, a trust can help to avoid IHT and ensure that the majority of your money, shares and equity are passed on in the most efficient way. Should you consider setting up a trust? Future legislation could potentially result in changes to tax law, which could in turn require adjustments to your plans.
We hope you find this checklist useful, but please bear in mind that this only provides a summary of the options available and not all options will be suitable for everyone. Therefore, for more information in respect of the ideas outlined, please contact us.
A pension is a long-term investment not normally accessible until age 55 (57 from April 2028 unless plan has a protected pension age). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The value of your investments can go down as well as up and you may get back less than you invested. The financial conduct authority does not regulate taxation and trust advice. Trusts are a highly complex area of financial planning.
Due to rising property prices more of us are falling into the IHT liability category
You can pass your assets to your partner IHT-free (in most cases)
With thousands more households now falling into the inheritance tax liability category, it is important that you have a conversation sooner rather than later
Your estate consists of everything you own including:
To find out about our Inheritance Tax planning services, please get in touch.
Head of Estate Planning, Mark Chandler, discusses the services that Ellis Bates offer around Inheritance Tax planning services and making a Will.
For more information, please get in touch.
We all want to leave a legacy and make sure the ones we care about most are well taken care of when we’re gone. That’s why Inheritance Tax planning is so important, to have confidence that your children, grandchildren and those you hold dearest will be taken care of long into the future.
Inheritance Tax is a tax on the estate of someone who has passed away. The standard Inheritance Tax rate is 40% in the current 2022/23 tax year. Your estate consists of everything you own. This includes savings, investments, property, life insurance payouts (not written in an appropriate trust) and personal possessions. Your debts and liabilities are then subtracted from the total value of your assets.
Every person in the UK currently has an Inheritance Tax allowance of £325,000 (frozen until April 2026). This is known as the nil-rate band (NRB). In 2017, an extra allowance was introduced to make it easier to pass on your main residence to direct relatives (i.e. a child or grandchild) without incurring Inheritance Tax. This allowance is currently £175,000, known as the residence nil-rate band (RNRB), and is on top of the standard nil-rate band of £325,000.
A tapered withdrawal applies to the RNRB when the overall value of an estate exceeds £2 million. The withdrawal rate is £1 for every £2 over the £2 million threshold.
If you are married or in a registered civil partnership, you are allowed to pass on your assets to your partner Inheritance Tax-free in most cases. The surviving partner is then allowed to use both tax-free allowances. Provided the first person to pass away leaves all of their assets to their surviving spouse, the surviving spouse will have an Inheritance Tax allowance of £650,000 (£1 million if they are eligible for the RNRB).
According to recent figures released by HM Revenue & Customs (HMRC), more estates in the UK are now paying Inheritance Tax than ever before[1].
Inheritance Tax receipts totalled £6.1 billion in the 2021/2022 tax year, up £729 million on the year prior. This 14% increase marks the largest single-year rise in Inheritance Tax receipts since the 2015/2016 tax year. The increase is the result of the ongoing freeze on the nil-rate Inheritance Tax band and residence nil-rate Inheritance Tax band.
Many more families are finding the total value of their estate – driven by a rapid growth in house prices, savings and other assets – is likely to be above £1million at the point of death, meaning many more estates could end up having to pay Inheritance Tax unexpectedly
In the 2019/20 tax year, there were 23,000 such deaths, up 4% on the year prior[1]. Given this data only covers to the start of the pandemic, this number is likely to have risen considerably over the past couple of years as asset prices grew.
With many more estates likely to be subject to an Inheritance Tax bill, it remains important that you have a conversation with your loved ones sooner rather than later so that you all fully understand your estate, the value of it and the potential to pay an Inheritance Tax bill.
When discussing your Will and any potential Inheritance Tax liability, there are things that can be put into place to mitigate or reduce a future payment.
That’s why planning for Inheritance Tax is a fundamental part of financial planning. It could potentially save your family thousands of pounds in Inheritance Tax payments when you die and ensure that your wealth is preserved for future generations.
We understand every situation is unique. We’ll help you to identify any specific issues and recommend the changes needed to help you meet your long-term wealth protection goals in the most tax-efficient manner. To find out more, please speak to us.
Source data: [1] https://www.gov.uk/government/statistics/inheritance-tax-statistics-commentary/inheritancetax-statistics-commentary
The Financial Conduct Authority does not regulate taxation and trust advice and will writing. Trusts are a highly complex area of financial planning. Information provided and any opinions expressed are for general guidance only and not personal to your circumstances, nor are intended to provide specific advice. Tax laws are subject to change and taxation will vary depending on individual circumstances.
There are many ways you might be able to reduce (or even eliminate) a potential liability.
But the longer you wait, the more expensive some of these options might prove.
It goes without saying that none of us know when our time will come.
That’s why it can really help to start making plans now. Doing so could help you maximise the amount of inheritance you leave to loved ones.
We discuss what gifting is, what types of gifts there are and what is meant by potentially exempt transfers.
Remember the seven-year rule
An outright gift falls into one of two categories, depending on the type of gift and to whom it’s made. These categories are Potentially Exempt
Transfers (PETs) and Chargeable Lifetime Transfers (CLTs).
Inheritance Tax exemptions can be achieved by means of making certain exempt transfers, which apply in a number of cases including wedding gifts, life assurance premiums, gifts to your family and charitable giving.
If appropriate, you can transfer some of your assets while you’re alive – these are known as ‘lifetime transfers’. Whilst we are all free to do this whenever we want, it is important to be aware of the potential implications of such gifts with regard to Inheritance Tax. The two main types are Potentially Exempt Transfers and Chargeable Lifetime Transfers.
Potentially Exempt Transfers are lifetime gifts made directly to other individuals, which includes gifts to Bare Trusts. A similar lifetime gift made to most other types of trust is a Chargeable Lifetime Transfer. These rules apply to non-exempt transfers: gifts to a spouse are exempt, so are not subject to Inheritance Tax.
Where a Potentially Exempt Transfer fails to satisfy the conditions to remain exempt – because the person who made the gift died within seven years – its value will form part of their estate. Survival for at least seven years, on the other hand, ensures full exemption from Inheritance Tax. Chargeable Lifetime Transfers are not conditionally exempt from Inheritance Tax. If it is covered by the ‘nil-rate band’ (NRB) and the transferor survives at least seven years, it will not attract a tax liability, but it could still impact on other chargeable transfers.
Chargeable Lifetime Transfers that exceed the available NRB when they are made result in a lifetime Inheritance Tax liability. Failure to survive for seven years results in the value of the Chargeable Lifetime Transfers being included in the estate. If the Chargeable Lifetime Transfers are subject to further Inheritance Tax on death, a credit is given for any lifetime Inheritance Tax paid.
Following a gift to an individual or a Bare Trust (a basic trust in which the beneficiary has the absolute right to the capital and assets within the trust, as well as the income generated from these assets), there are two potential outcomes: survival for seven years or more, and death before then. The former results in the potentially exempt transfer becoming fully exempt and no longer figuring in the Inheritance Tax assessment. In the other case, the amount transferred less any Inheritance Tax exemptions is ‘notionally’ returned to the estate.
Anyone utilising potentially exempt transfers for tax migration purposes, therefore, should consider the consequences of failing to survive for seven years. Such an assessment will involve balancing the likelihood of surviving for seven years against the tax consequences of death within that period.
Failure to survive for the required seven-year period results in the full value of the potentially exempt transfers being notionally included within the estate; survival beyond then means nothing is included. It is taper relief which reduces the Inheritance Tax liability (not the value
transferred) on the failed potentially exempt transfers after the full value has been returned to the estate.
The value of the potentially exempt transfers is never tapered. The recipient of the failed potentially exempt transfers is liable for the Inheritance Tax due on the gift itself and benefits from any taper relief. The Inheritance Tax due on the potentially exempt transfers is deducted from the total Inheritance Tax bill, and the estate is liable for the balance.
Lifetime transfers are dealt with in chronological order upon death; earlier transfers are dealt with in priority to later ones, all of which are considered before the death estate. If a lifetime transfer is subject to Inheritance Tax because the NRB is not sufficient to cover it, the next step is to determine whether taper relief can reduce the tax bill for the recipient of the potentially exempt transfers.
The amount of Inheritance Tax payable is not static over the seven years prior to death. Rather, it is reduced according to a sliding scale dependant on the passage of time from the giving of the gift to the individual’s death.
No relief is available if death is within three years of the lifetime transfer. For survival for between three and seven years, taper relief at the following rates is available.
The rate of Inheritance Tax gradually reduces over the seven-year period – this is called ‘taper relief’. It works like this:
| How long ago was the gift made? | How much is the tax reduced? |
| 0-3 years | No reduction |
| 3-4 years | 20% |
| 4-5 years | 40% |
| 5-6 years | 60% |
| 6-7 years | 80% |
| 7 years + | No tax to pay |
It’s important to remember that taper relief only applies to the amount of tax the recipient pays on the value of the gift above the NRB. The rest of your estate will be charged with the full rate of Inheritance Tax – usually 40%.
The tax treatment of Chargeable Lifetime Transfers has some similarities to Potentially Exempt Transfers but with a number of differences. When a Chargeable Lifetime Transfer is made, it is assessed against the donor’s NRB. If there is an excess above the NRB, it is taxed at 20% if the recipient pays the tax or 25% if the donor pays the tax.
The same seven-year rule that applies to Potentially Exempt Transfers then applies. Failure to survive to the end of this period results in Inheritance Tax becoming due on the Chargeable Lifetime Transfers, payable by the recipient. The tax rate is the usual 40% on amounts in excess of the NRB, but taper relief can reduce the tax bill, and credit is given for any lifetime tax paid.
The seven-year rules that apply to Potentially Exempt Transfers and Chargeable Lifetime Transfers could increase the Inheritance Tax bill for those who fail to survive for long enough after making a gift of capital. If Inheritance Tax is due in respect of a failed Potentially Exempt Transfer, it is payable by the recipient.
If Inheritance Tax is due in respect of a Chargeable Lifetime Transfer on death, it is payable by the trustees. Any remaining Inheritance Tax is payable by the estate.
The Inheritance Tax difference can be calculated and covered by a level or decreasing term assurance policy written in an appropriate Trust for the benefit of whoever will be affected by the Inheritance Tax liability and in order to keep the proceeds out of the settlor’s Inheritance Tax estate. Which is more suitable and the level of cover required will depend on the circumstances. If the Potentially Exempt Transfers or Chargeable Lifetime Transfers are within the NRB, taper relief will not apply.
However, this does not mean that no cover is required. Death within seven years will result in the full value of the transfer being included in the estate, with the knock-on effect that other estate assets up to the value of the Potentially Exempt Transfers or Chargeable Lifetime Transfers could suffer tax that they would have avoided had the donor survived for seven years.
A seven-year level term policy could be the most appropriate type of policy in this situation. Any additional Inheritance Tax is payable by the estate, so a Trust for the benefit of the estate legatees will normally be required.
Where the Potentially Exempt Transfers or Chargeable Lifetime Transfers exceed the NRB, the tapered Inheritance Tax liability that will result from death after the Potentially Exempt Transfers or Chargeable Lifetime Transfers are made can be estimated.
A special form of ‘gift inter vivos’ (a life assurance policy that provides a lump sum to cover the potential Inheritance Tax liability that could arise if the donor of a gift dies within seven years of making the gift) is put in place (written in an appropriate Trust) to cover the gradually
declining tax liability that may fall on the recipient of the gift.
Trustees might want to use a life of another policy to cover a potential liability. Taper relief only applies to the tax: the full value of the gift is included within the estate, which in this situation will use up the NRB that becomes available to the rest of the estate after seven years.
Therefore, the estate itself will also be liable to additional Inheritance Tax on death within seven years, and depending on the circumstances, a separate level term policy written in an appropriate trust for the estate legatees might also be required.
Where an Inheritance Tax liability continues after any Potentially Exempt Transfers or Chargeable Lifetime Transfers have dropped out of account, whole of life cover written in an appropriate Trust should also be considered.
To discuss how we could help you and to learn more about our Tax Planning services and Inheritance Tax services, please contact us today.
Last week Jeremy Hunt unveiled his Autumn Statement aimed at tackling inflation and stabilising UK finances. The Chancellor detailed issues such as tax, government spending and energy as part of his plan to navigate the impending recession.
Your Ellis Bates team are busy reviewing your situation given these changes and you will be discussing the implications and actions with your Financial Adviser in your next review.
If you are not currently a client with Ellis Bates and feel now is the time to discuss your tax allowance maximisation, your new CGT position and pension planning in light of these changes, please do not hesitate to book a chat as we are here to help.
Your Ellis Bates Financial Adviser will work with you to determine if you need to consider alternative ways to save towards your retirement in light of these changes at your next review.
National Insurance thresholds will remain frozen until April 2028.
The nil rate band will remain at £325,000, the residence nil-rate remains at £175,000, and the residence nil-rate band taper will still start at £2 million.
In April 2023 Capital Gains Tax (CGT) annual exempt amount will be reduced from £12,300 to £6,000. It will be reduced further to £3,000 from April 2024
Your Ellis Bates team are busy reviewing your situation given these changes in CGT and will be in touch over the coming weeks.
There will be no change to the rate of Capital Gains Tax:
| Tax Band | Tax rate for Property Sale | Tax rate for other Asset |
| Basic Rate | 18% | 10% |
| Higher Rate | 28% | 20% |
There will be no immediate change to Stamp Duty Land Tax (SDLT), the increases which were implemented on 23rd September 2022 (SDLT nil-rate threshold was increased from £125,000 to £250,000. The nil-rate threshold paid by first-time buyers was increased from £300,000 to £425,000) will remain until March 2025, after which the allowances will revert to their previous levels.
If you are a business owner, a number of changes and support systems were announced:
If you would otherwise pay higher rate CGT (20 per cent), this means you can save up to £1m in your lifetime through entrepreneurs’ relief.
If you are a business owner and an Ellis Bates client, your dedicated Financial Adviser will discuss these changes and how they may affect you and the actions needed in your next annual review meeting.
Stay updated: we update our Financial Advice hub with the latest financial news and insights, so hit the link to stay informed and up to date
If you do not currently receive financial advice from Ellis Bates, please Book a Chat to discuss this raft of tax changes and how we can help.
Sources: https://www.which.co.uk/news/article/capital-gains-and-dividends-tax-changes-in-the-2022-autumn-statement-ac6kT0e7yZ4X
https://www.gov.uk/government/publications/autumn-statement-2022-documents/autumn-statement-2022-html#:~:text=The%20Autumn%20Statement%20sets%20out%20a%20package%20of%20targeted%20support,bill%20increases%20following%20the%20revaluation.
What will your legacy look like?Estate planning is about putting your affairs in order, to help make the lives of your loved ones easier. It can help to protect your estate for your beneficiaries and reduce the impact of Inheritance Tax (commonly called IHT for short).
IHT is something many of us don’t know enough about. Simply because we don’t think we need to.
Traditionally, only the wealthiest in society were affected by IHT. But rising property prices means more and more people are now facing it. It all comes down to the value of your overall estate upon your death. If it’s worth more than your personal nil-rate band (NRB), anything above could be liable to IHT at up to 40%. (If you’re single or divorced, the NRB is £325,000 and if you’re married, in a registered civil partnership or widowed, it’s up to £650,000).
If you’re wondering what the RNRB is, this can be used alongside your usual NRB – and was introduced to help more people reduce their IHT liability. Every UK adult has a RNRB of £175,000. But the rules can be more complex than many people realise. Amongst the restrictions, you can only use this allowance if it relates to a property you have lived in, and passed to a direct descendant (such as your child or grandchild – not a friend, niece or nephew).
Your savings and investments, car and any rental properties form a part of your estate. Not forgetting any jewellery you have, household furniture or expensive paintings (minus any liabilities, like an unpaid mortgage). After working out the value of your belongings, you may be surprised by how much your estate comes to. It could be worth a lot more than you think. It’s also important to bear in mind that these assets could increase or decrease in value in the future.
The latest IHT figures should be a ‘wake-up call’ for families to think carefully about their tax planning. IHT receipts in the United Kingdom amounted to approximately £5.32 billion in the financial year 2020/21[1].
There are plenty of perfectly legal steps you can take to protect your family’s wealth from the taxman. The IHT solutions include annual exemptions, allowances, direct gifts and trusts.
Of course, there are many different options to choose from – so it’s important you find one that’s right for you. With this in mind, and the fact that IHT can be a complex subject, you should always obtain professional financial advice to guide you through the complexities – and help you put suitable plans in place.
How can you leave a tax-efficient legacy? We’ll help you leave more to those you love most. Although it’s not nice to think about, getting your affairs in order for when you pass away can bring real peace of mind as you get older. To find out more, please contact us to discuss your requirements or visit our Inheritance Tax page.
Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.
Source data: [1] https://www.statista.com/statistics/284325/united-kingdom-hmrc-tax-receipts-inheritance-tax/