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Minding the estate

30 March 2017

Effective estate planning can reduce an Inheritance Tax bill and provide valuable financial support for the family during your lifetime.

We probably all know a heart-warming story about someone who left an inheritance, from the industrialist who donated his fortune to charity, to the recluse who left her worldly possessions to her housekeeper.

Yet we often hear tales of woe and missed opportunity too: families left to squabble over money, and children forced to pay huge bills. In many cases, family feuds and unnecessary tax bills occur due to a lack of foresight and a failure to use the valuable allowances and reliefs that are available each tax year.

Most of us spend our lives working to provide for our family, so it’s reasonable to assume that we would want to take every opportunity to preserve our wealth and pass it on to our designated beneficiaries tax-efficiently.

Where there’s a Will

Writing a Will* is normally the first step towards making our wishes concrete and establishing who should get what, but it can also be an opportunity to reduce an Inheritance Tax (IHT) bill.

Assets that go straight to children trigger a tax charge if they exceed the IHT nil-rate band, whereas assets passed between husband and wife or civil partners generally do not. Yet without a valid Will, your estate will be divided up according to the rules of intestacy – which do not guarantee that your spouse will inherit your whole estate.

For instance, when comedian and actor Rik Mayall died unexpectedly in June 2014, his family was reportedly left with a tax bill on his estate because he had failed to make a Will. Instead of his whole estate passing to his wife, it was divided between his wife and his three children under the rules of intestacy. If his children’s share was worth more than the individual IHT threshold of £325,000, they could have been liable to pay 40% tax on anything they inherited over that amount.

The Office for Budget Responsibility believes that more than 40,000 estates will be liable for IHT this year.1 It’s not surprising when you consider that the IHT nil-rate band has remained at £325,000 per person since 2009, and will be fixed until 2021.

But there has been some good news too. From 6 April this year, a new IHT residence nil-rate band will be introduced. This provides a new transferable allowance for married couples and civil partners when a home is passed down to children. The allowance will initially be for £100,000 per individual, and will increase in £25,000 increments annually to £175,000 in 2020/21. This is in addition to an individual’s own nil-rate band of £325,000.

Nevertheless, the rules are not straightforward and not everyone will benefit; many individuals will still want to find ways to minimise the amount of tax due on their estate after they die. This is where lifetime gifting can play a vital role; and the end of the tax year presents the last opportunity to use the current exemptions before they are lost forever.

To give is to gain

Many individuals have the desire and ability to give away some of their wealth during their lifetime. The pleasure derived from knowing that younger generations will benefit from lifetime gifts needs to be measured against the very real need to help younger family members face up to today’s financial challenges.

The average age of a first-time homebuyer is now 33, and the average deposit needed is £34,0002. That could be on top of university costs – the average graduate has university debts of £44,0003. Regular investment of gifting exemptions through wrappers such as Junior ISAs, savings plans or even children’s pensions, can go a long way to providing an invaluable head start.

In any one tax year, an individual can make IHT-exempt gifts of up to £3,000, which can be given to one person or broken into any number of smaller gifts. If you don’t use one year’s exemption, it can be carried forward into the next tax year – but only the next year. After that, the exemption is lost.

“Using the ‘carry forward’ provisions, a couple could potentially remove £12,000 from their joint estate immediately,” says Tony Müdd, divisional director, development & technical consultancy at St. James’s Place. “If used systematically over successive years, significant sums can be saved.”

If your estate is likely to be hit by IHT when you die, and you can afford to give some money away now, then you may wish to move quickly. With just days remaining until the end of the 2016/17 tax year, you only have a short window of opportunity to make this year’s allowance count – and to carry forward last year’s, if you haven’t used it already


The value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise.  You may get back less than the amount invested.

The levels and bases of taxation and reliefs from taxation can change at any time and are dependent on individual circumstances.

*Wills are not regulated by the Financial Conduct Authority. Will writing involves the referral to a service which is separate and distinct to those offered by St. James's Place.

1 Office for Budget Responsibility, March 2016
2 Halifax, July 2016
3 Sutton Trust, April 2016

Some of the products and investment structures documented within this article will not be available to our clients in Asia. For information on the funds that are available please get in touch.


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