
Why is inheritance planning important
Introduction to estate planning
Between April and October 2024, IHT receipts reached 5.0 billion pounds sterling, a significant increase of 0.5 billion pounds sterling compared to the same period of the previous year. The factors stimulating this increase include:
- Increase in properties of properties, which push areas above the IHT thresholds.
- The IHT Nile-Rate Frozen band, which has remained £ 325,000 since 2009. If it is adjusted for inflation (RPI), the zero rate band would exceed £ 450,000.
Proactive inheritance planning is essential to mitigate the increasing financial impact of the IHT on families and their assets.
Normal income expenses
One way to reduce the taxable value of a succession is through gifts made under the exemption “normal income expenditure”. However, these gifts must meet strict criteria:
- Regularity: gifts should be part of a usual scheme, such as annual holiday costs, education costs or recurring premium payments.
- Origin of income: Gifts must be made of donor income, not the accumulated capital. The HMRC considers that revenues become capital after two years.
- Sustainability: donors must keep enough income to maintain their standard of living.
Advice: Maintain detailed files to support complaints and avoid potential disputes with HMRC.
RESIDENCE NIL-DAD-DAD BAND (RNRB)
Presented in 2017, the RNRB offers additional IHT relief to people leaving their main residence for the descendants directly.
Key points and traps:
- The complete allocation of £ 175,000 per individual is only available if the succession is estimated at 2 million pounds sterling or less.
- Domains exceeding 2.35 million pounds sterling lose the RNRB entirely.
- Spouses with separate areas of less than 2 million pounds sterling can lose the RNRB the second death if planning is inadequate.
Planning advice: Consider the tenants in common property and leaving property to children the first death to preserve the RNRB. The rules for reducing the workforce also apply but require meticulous file holding to trace the flow of funds.
Use of the Rysaffe principle to reduce the IHT
The principle of Rysaffe, established in Rysaffe Trustee Co against Inland Revenue Commissioners (2003)Allows individuals to create several smaller trusts instead of great confidence.
Benefits:
- Each trust benefits from (almost) its own bunch of £ 325,000.
- Periodic costs and exit costs are minimized, which causes significant savings.
For example, the use of 10 trusts could save nearly £ 195,000 in IHT.
Family Investment Companies (FICS)
Family investment companies offer a flexible alternative to trustees, offering control and adaptability.
Key characteristics:
- Structure: Parents often have voting actions with limited capital rights, while growing actions are issued to children or trustees.
- Funding: Parents generally lend money to the FIC without interest. These loans are part of their succession but can be reimbursed or affected if necessary.
- Tax efficiency: revenues accumulated within trustee can cover future expenses such as school costs.
Changes made to business relief (BR) and the relief of agricultural goods (APR)
From April 2026, significant changes will affect these reliefs:
- 100% lounges will only apply to the first million Sterling pounds in APR and BR combined.
- Relief will reduce to 50% for values greater than 1 million sterling pounds without a transferable allowance to a surviving spouse.
- AIM shares will be eligible for a 50% repair
Planning window:
- Before April 2026, consider donations squarely admissible to children or the implementation of trustees to fully take advantage of the current rescue levels.
Tax on successions on pensions
From April 2027, pensions will be subject to the IHT, which has a considerable impact on individuals with high shuttle.
Key implications:
- The 40% IHT will apply to the pension pot.
- The beneficiaries face additional income tax when removing funds, which only leaves them 33% of the overall value of the pension.
Mitigation strategies:
- Explore the jurisdictions adapted to taxes and retirement suits abroad recognized (Qrops) – but note that there is now a “exit load” of 25% when exporting a retort
- Regular gifts of excess income under the exemption from “normal spending” can help reduce taxable succession.
Employee profit trust (EBT)
Many EBTs established in the 1990s and 2000s faced unexpected IHT liabilities due to the loans extracted by directors. Even when the loans are reimbursed, the HMRC can always perceive loads according to their original nominal value.
Current challenges:
- TIH ten annual fees apply according to the original loan value.
- Exit costs can also occur when loans are struck off.
A new revision of the legislation on loan costs has been promised, but companies should prepare for potential liabilities.
Conclusion
Navigating in the complexities of inheritance planning requires careful examination of the evolution of legislation and proactive strategies. Whether by taking advantage of the RNRB, using the Rysaffe principle or by exploring the FIC, a tailor -made plan can considerably reduce IHT passives while preserving wealth for future generations.
Following steps for inheritance planning
The tax etc can ensure that your inheritance planning will align with your objectives and remains in accordance with evolving regulations. Please contact us if you want more information or help in your estate planning