What is Inheritance Tax?

Inheritance Tax is a tax on your estate including your property, your money and your possessions.

The current standard rate of inheritance tax is 40% and it is charged on the part of the estate above the current threshold of £325,000 (otherwise known as the ‘individual nil-rate band').

There are extra allowances you can claim. For example, if you are passing on a property to your immediate family, your executors can claim a further £175,000 (as long as your total estate is worth less than £2,000,000). But what is clear is that calculating how much your family will have to pay is not easy.

With careful planning, we can help you take control over your arrangements so that you can pass on as much of your estate as possible to who you want to receive it. Together, we can minimise the amount your loved ones will have to pay.

The levels and bases of taxation, and reliefs from taxation, can change at any time. The value of any tax relief depends on individual circumstances.

The main things that might increase the IHT payable are:

• gifts made within the last seven years

• gifts made at anytime where you have also retained some benefits

• if you are a beneficiary of a trust

• if you and your spouse/civil partner are domiciled in different countries

• if you and your partner are unmarried/non-civil partners and are leaving assets to each other

• if you have a pension fund that might result in a lump sum being paid to your spouse/partner

The main things that might reduce your liability are:

• if you have previously been bereaved through loss of a spouse/civil parent

• having certain business or agricultural assets

• if you are not domiciled in the UK and have non-UK assets

• leaving part of your estate to charity

What can you do to mitigate your potential IHT liability?

Thinking about IHT early will give you the greatest number of options and small interventions now could make a huge difference to your families.

A combination of the following options may be used:

• Spend it

• ensure you have a Will

• prevent the estate increasing unnecessarily

• give it away outright

• arrange estate cover to pay the inheritance tax liability

However, giving away assets outright will mean you will lose control of the funds. Most people are reluctant to do this, for two main reasons; depending on future circumstances they may want and need the funds themselves, or they may feel the receiver of the gift is not ready or able to manage the funds gifted.

This is where the use of trusts can help. There are many different trusts available that could help reduce your inheritance tax bill upon your death, all with their own specific features. Depending on whether you need access the the original capital in the future, a fixed income or a flexible return of capital and growth in the future, there really is a trust in the market to suit your needs but at the same time is an effective tool to reduce your inheritance tax liability.

Before settling any money in trust, it is strongly recommended that you receive independent financial advice so that your circumstances, future plans and future wishes are considered in full and the correct investment and trust is recommended to suit your individual circumstances.

Smart Independent Financial Advice can advise on the whole of the market, and will consider all appropriate trusts that will help to reduce any future inheritance tax, but at the same time give you the control and flexibility on your capital that you require now and in the future.

HSBC Gift Trust – capital can be placed in trust and this falls outside your estate for Inheritance Tax provided you live for 7 years. The client has no access to money from the trust. You would be a trustee of your Gift trust so would be able to exercise control over how the trust fund is invested and depending on the type of trust used, have control over when a beneficiary can benefit from the trust

HSBC Loan Trust – a cash sum is loaned to the trust, which is invested and any growth on that investment is outside of your estate for Inheritance Tax purposes. You may take regular repayments of the loan to supplement your income. Any outstanding loan remains in your estate on death for Inheritance Tax purposes.

HSBC Discounted Gift Trust – capital is placed in trust, part of which falls outside the Inheritance Tax estate provided you live for 7 years, and part should fall outside the estate immediately. You retains access to regular payments from the trust during your lifetime or until the investment runs out.

and the increasingly popular,

Flexible Reversionary Trust -  A flexible solution where the client gifts money to a trust and has the option of taking capital payments in the future. They can forgo or defer access to capital payments if they wish, so they can achieve their objectives without having to make irrevocable decisions about their own future financial needs. The Lifestyle trust can help you mitigate their inheritance tax liability and manage the future distribution of assets.

Inheritance tax is not regulated by the Financial Conduct Authority.