Life can be a complex journey, and thinking about what happens when we’re no longer here may not be the cheeriest topic. But getting ready for the unknown is not just a good idea; it’s a way to show love for your family. When it comes to protecting your hard-earned money and passing it on to your loved ones in the United Kingdom (UK), it’s crucial to understand inheritance and succession planning. This guide is your helpful companion, shedding light on the complicated world of taxes, allowances, reliefs, and Business Relief.
In this session we consider the following aspects of inheritance and succession planning. Future sessions will cover other critical elements including:
- The basics of inheritance tax
- Business relief
- Using Family Investment Companies
- Inheritance Tax and Pensions
- Emigration
- Post-Death Inheritance Tax
- Lifetime Transfers and Exemptions
- Interaction Between Inheritance Tax (IHT) and Capital Gains Tax (CGT)
Understanding UK Inheritance Tax: The Basics:
At the core of this process lies Inheritance Tax (IHT), a financial obligation that comes into play upon your passing or when you make significant lifetime gifts. This tax affects the distribution of your assets and wealth, and it’s essential to grasp its fundamental principles for your legacy planning. Inheritance Tax is essentially a charge made on your assets by the tax authorities when you pass away. So, let’s begin by understanding the basic principles of Inheritance Tax, laying the groundwork for your legacy planning.
- Nil-Rate Band (NRB): The Nil-Rate Band is a set threshold, currently at £325,000, that acts as a protective barrier for your estate. It allows you to pass on assets up to this value to your beneficiaries without incurring Inheritance Tax. If you’re married or in a civil partnership, your spouse can also use their NRB, potentially doubling the protection for your combined assets.
- Residential Nil-Rate Band (RNRB): The Residential Nil-Rate Band is an additional layer of protection primarily designed for homeowners. It applies to a portion of your residential property’s value when you pass it on to your direct descendants, such as your children or grandchildren. The RNRB works alongside the NRB, potentially enhancing the overall relief available to your estate.
- Gifts and Allowances: Inheritance Tax doesn’t apply to all gifts. Certain exemptions exist. For example, you can make financial or property transfers to your spouse or registered charities without triggering Inheritance Tax. There’s also an annual gift allowance of £3,000, which permits you to give away this amount each year without Inheritance Tax implications. However, if you exceed this allowance, Inheritance Tax may come into play, unless you live for at least seven more years, after which the gifts become exempt from this tax.
Protecting Family Businesses with Business Relief
Now, let’s explore a bit more about owning a business. Business Relief is a way to keep family businesses and farms safe from Inheritance Tax. It can reduce the tax bill by 50% or even 100% on the value of the business or its assets.
- Trading Businesses: If you own a business, you might qualify for 100% Business Relief, which means the entire value of your business can be protected from Inheritance Tax. However, you need to have owned the business for at least two years to qualify.
- Agricultural Relief: If you have farmland, you might get 100% relief, which is great for keeping your farming legacy in the family. Just keep in mind that this usually doesn’t include the farmhouse unless it meets specific conditions.
Family Investment Companies (FICs) for Long-Term Planning
There’s also an important addition to long-term wealth management and succession planning called Family Investment Companies (FICs). FICs are like private companies set up to manage family assets and investments. By transferring your assets to an FIC, you can keep control of your wealth, make asset management more straightforward, and possibly reduce Inheritance Tax. FICs do not necessarily wipe out your inheritance tax liability, but can act as a mechanism to cap the value of your estate so it doesn’t increase in value.
FICs offer flexibility in how you distribute wealth among family members. You can gift or sell shares in the FIC, making it easier to pass your wealth from one generation to the next. What’s more, under specific conditions, FICs may qualify for Business Relief, which can exempt the business’s value from Inheritance Tax.
In the United Kingdom, understanding the intricacies of inheritance and succession planning can be daunting. But there’s more to this than just numbers and taxes. Inheritance and succession planning are about making sure your money and property go to the people you care about. It’s also about securing your family’s future. So, it’s essential to start early, seek professional advice, make the most of allowances and reliefs, and regularly review your plan. Tax laws can change, making it crucial to seek advice from experts in the field to stay abreast of these changes and make tax-efficient decisions. By doing so, you’re not only shielding your family from financial strain but also preserving a lasting legacy for future generations. In the complex world of Inheritance Tax, remember that Business Relief can be a valuable tool, helping your legacy stand the test of time.
written by Victoria Lancefield