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  • How to Determine your Estate Planning Needs

    20 November 2017

    Andy Wood

    Tax and estate planning

    By understanding your estate planning needs and objectives, you can ensure that it is your intended beneficiaries that enjoy the maximum value from your estate – and that there are no unintentional heirs or heiresses such as HMRC!

    There is, however, no magic bullet to solve your estate planning needs. Simply, not all estate planning is equal, because not all estates are equal!

    Whatever the make up and present value of your estate – which will be the aggregate of all your assets and liabilities be that property, shares, capital, cash etc – your wealth as a whole is at chronic risk from multiple threats. Such financial predators come in all shapes and sizes, including commercial creditors, breakdown in relationships, and the tax man on death.

    All could be potentially detrimental to your estate.

    It’s rarely the case that you will have the benefit of foresight or advanced warning in order for you to make swift, reactive and effective adjustments to your estate planning strategy, which is why your estate planning requires attention well in advance of any ‘need’ materialising.

    At 40%, Inheritance Tax presents one of the more potent threats to inter-generational wealth protection. And with the IHT threshold, relatively speaking, at its lowest ever level, IHT is no longer just a concern of the ‘super wealthy’.

    It is also a viable prospect that HMRC will seek to tighten up the IHT rules by potentially restricting the availability of, or refocusing, certain reliefs. As such, we advocate taking action sooner to make use of reliefs while they remain available.

    There are many legitimate and effective ways you can provide effective shelter for your estate, by taking a measured approach to identifying your estate planning needs.

    Step 1: Set your goals 

    Fundamentally, your estate planning needs should be determined by what you want to achieve.

    Tax planning may not be your primary concern – you may for example be more concerned about retaining an asset of sentimental value for the family.

    Be clear therefore on your goals to determine your estate planning needs. These could include:

    • Reducing your partner’s IHT liability where you are not married.
    • Protecting your children’s inheritance from relationship breakdown or bankruptcy after your death.
    • Protecting some or all of your estate for future generations or other intended beneficiaries.
    • Avoiding ‘double taxation’ on your estate by IHT when your children leave the estate to your grandchildren.
    • Restructuring property investment activities to secure some form of IHT relief.
    • Safeguarding the inheritance of your children from a previous relationship.
    • Dealing with situations where you own assets across multiple jurisdictions.

    Step 2: Tax planning

    Tax planning generally means getting the balance right between sheltering your assets from tax liability and retaining a sufficient level of access and control to maintain your desired lifestyle.

    As you would perhaps expect, it’s generally the case that the more tax efficient a structure, the less accessible it will be.

    The main estate planning devices could be summarised as follows:

    Wills: efficient transfer of your assets on death to intended beneficiaries.

    A will is always a good idea even it it just allows a person to avoid the provisions of intestacy. The more complex and valuable the estate the more one should be encouraged to take specialist advice in this area and certainly where there are assets in multiple jurisdictions. One should also bear in mind that it is important to keep a will up to date and fit for purpose.

    Lifetime gifts: tax-efficient asset disposal before death through ‘gifting’.

    Transfer some of your accumulated wealth to beneficiaries, while reducing the size of your estate. A number of gifts are immediately exempt from IHT, such as gifts made within the annual exemption of £3,000 and for the maintenance of dependants.

    Trusts: protection of assets, sharing wealth benefit without relinquishing ownership.

    A discretionary trust provides flexibility and control over beneficiaries and the benefit received. Assets in trust will be deemed outside your estate if you survive seven years or more. Any growth in the value of the investment is inside the trust, but outside your taxable estate.

    Other structures such as Companies and Partnerships. 

    These can be used as an alternative to trusts. They are not subject to the same, often punitive, tax regime that applies to trusts. However, they may not have the same flexibilities as the trust.

    Fundamentally, all estate planning needs centre on creating protection from external threats and events. It is highly unlikely that any one solution will meet all of your estate planning needs. Seek advice on suitability and application of the various options available, which could more broadly include:

    Business property

    One of the most generous reliefs available for inheritance tax purposes is Business Property Relief (“BPR”). A detailed discussion of this important relief is outside the scope of this article, however, where a person holds a qualifying interest in a trading business then it is likely to be 100% exempt from IHT. As such, a shareholding in an unquoted trading company, where the shares are owned for two years, is likely to qualify for BPR.

    However, one can also go out to the retail market and invest cash into portfolios which qualify for this relief. For example, one can invest in baskets of shares that are quoted on the Alternative Investment Market which, albeit quoted, do not constitute ‘quoted’ for the purposes of BPR. As such, once the investment has been held for two years then the value is fully outside the scope of UK IHT.

    Agricultural property

    Land which is used for agricultural purposes might also qualify for Agricultural Property Relief (“APR”) which is a similar relief to BPR.

    Nil rate band

    Spouses and civil partners can take advantage of the double nil rate band where the first deceased partner transfers all of their estate to their partner on death. On the death of the second partner, their estate benefits from the nil rate of both parties – as at October 2017, this equates to £650,000 at 0%.

    With effect rom 6 April 2017, the first £100,000 in value of a person’s home is also exempt from Inheritance Tax where it passes to a ‘direct descendant’. This is called the Residence Nil Rate Band (“RNRB”) and, what masquerades as a simple relief, suffers from the modern tax legislation problem of over-engineering. As such, it is unnecessarily complex.

    This threshold is set to rise by £25,000 every year to £175,000 by 2020/21. However, like many reliefs set out recently, and particularly those proposed under George Osborne’s tenure as Chancellor, it would not surprise if its life expectancy was rather short

    The normal NRB can then be applied to the balance of the value of the property and/or other assets in the estate.

    For higher value estates, the RNRB is tapered away.


    Trusts have been used for centuries to protect assets from all kinds of financial predators. Generally, any tax advantages which flow from them flow from the fact that that individual who has created the trust has chosen to gift the assets. The gift of an asset will have an IHT charge (for a gift, this can usually be ignored if the donor survives the gift by seven years) and also CGT implications if the asset is standing at a gain. Depending on the type of asset, and circumstances, there might be other tax implications.

    One also needs to take account of the same taxes where transferring assets to a normal family trust. However, a transfer to a trust, where the value of the asset exceeds the nil rate band (and does not qualify for any reliefs such as BPR) then there will be an immediate IHT charge of 20% on the excess. If the donor survives the transfer by seven years then there would be no further IHT consequences. If he or she dies within seven years then it is likely there will be a further 20% IHT to pay.

    Once in the trust, the value of the assets should not fall within the estate of any person. Such a trust will be subject to its own special regime, paying IHT at 6% each 10 year anniversary or where capital leaves the trust.

    From a Capital Gains Tax (“CGT”) perspective, the transfer of an asset to the trust will be a disposal where an asset is standing at a gain. This is the same position for an outright gift. However, it is likely that any gain arising on the transfer of an asset to a trust may be deferred – unlike an outright gift, where the asset must be a business asset to receive such treatment.

    Where only cash is being transferred there should be no CGT issues.

    Employer trusts can sometimes be used to transfer assets without either a IHT or CGT charge engaging. However, their use would depend on the circumstances and objectives, but might be useful for family investment companies.

    Family investment companies and family partnerships

    Due to the punitive IHT charge that can arise on investment assets being transferred to family trusts, the use of other vehicles has increased significantly over the last decade.

    Where the asset being transferred is cash then family investment companies are used. This is because there are no CGT or Stamp Duty issues when transferring cash to a company. However, chargeable assets would trigger a CGT charge and a transfer of property would create a Stamp Duty charge.

    The family investment company will create different classes of shares, which will have varying rights to income, capital and voting rights. Where these shares are given away to family members then the value of this gift is likely only to be taxable where the donor does not outlive it by seven years.

    Partnerships – including Limited Liability Partnerships (“LLPs”) and Limited Partnerships (“LPs”) – are also used by families looking to protect their assets. These tend to be preferred where assets are to be transferred as the rules relating to Partnerships tend to be favourable for both the purposes of CGT and Stamp Duty.

    Pension schemes

    Pension schemes tend to be very efficient from a tax perspective on death. One should ensure that this, potentially very valuable asset, is taken into account when setting one’s estate planning objectives.

    Step 4: Update your planning

    Just as your assets, liabilities and circumstances change, so too will the rules that govern estate taxation. As such, it is sensible to schedule a regular review of your estate planning needs to ensure they remain valid and aligned to your wishes.

    ETC Tax can help meet your estate planning needs

    As experienced tax consultants, ETC can advise on strategies to meet your estate planning needs – protecting your assets and providing your loved ones optimal financial benefit.

    We can help you achieve your desired level of shelter and access through a suitable combination of lifetime gifts, tax-efficient wills and the effective use of trusts, investments, structures and IHT exemptions. Our services, among others, include:

    Contact us for a no-obligation initial conversation about will and estate planning with one of our chartered tax specialists.