Intergenerational Planning Strategies for Effective Inheritance
Explore the challenges and strategies of effective inheritance planning, focusing on intergenerational wealth transfer. Discover key considerations like gifting strategies, taxation, and ways to ensure your wealth reaches the intended beneficiaries. Real-life case studies and expert insights offer valuable guidance for securing your family's financial future.
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Technical Services Brian Radbone Head of Technical Services
Topic for today The Challenge of Effective Inheritance Planning
Background Around 355bn is expected to be transferred to the next generation of families in the UK over the next 25 years (Kings Court Trust and Centre for Economics and Business) Do the younger generations need more help now? Increasingly complex family structures rch
Intergenerational Planning Why? You want to You have to if Help needed to get on the housing ladder, for example You want to ensure your wealth ends up where you want it to You want to minimize any tax you and your personal representatives will pay
Intergenerational Planning When? During lifetime As parents As grandparents Other people Deathbed planning eg: CGT, marriage Following death Will Pensions
Case study 1 Peter & Linda, mid 50s 2 adult children, 1 grandchild 1 child still at home No mortgage house worth 750,000 Still working combined income c 100,000 Other assets - 50,000 (cars, jewelry, etc) Savings (including ISAs) c 250,000 Peter s pension savings 350,000, Linda in public sector DB scheme Objective: to help children and grandchildren
Intergenerational Planning Gifting strategy Available allowances Annual Out of normalexpenditure 7 years then outside the estate NRB, currently 325,000
Intergenerational Planning Gifting strategy Outright gifts vs control PETs Designated accounts (?) Trusts FICs
Gifting for children Use a trust anyway? Gifts using annual allowance, normal expenditure and other transfers Jim and Mary Anne David Anne dies in a riding accident Unmarried and intestate Gifts returned to Jim and Mary in equal proportion IHT payable if Anne s NRB exceeded
Gifting for children Use a trust anyway? Place gifts into trust Jim and Mary Discretionary Trust Anne David Trust makes loans or distributes funds as required Any loans repaid to trust from Anne s estate following her death thus reducing her estate value
Intergenerational Planning Tax wrapper options JISA a nobrainer ? LISA first home purchase Investment bonds vs GIA Pensions
Case study 2 Peter & Linda, mid 60s, retired 2 adult children, 4 grandchild No mortgage house worth 1,000,000 Other assets - 60,000 Income from Linda s pension and savings income Linda recent inheritance of 500,000 Savings (including ISAs) c 650,000 Peter s untouched pension savings 500,000 Objective: to gift effectively but not impact standard of living
Gifting with access for income Two birds with one stone for Peter and Linda Settlors cannot gift property and still derive a benefit from it However, access is possible if you: Don t give it away straight away, or Give it away and take a future stream of regular payments back into your estate
Loan/Gift and Loan trusts Only loan now OK Gift amount originally required Bare or discretionary basis PET or CLT Growth outside estate Any gift amount outside estate after 7 years Loan repayment flexible Interest free and payable on demand Outstanding loan on death remains in estate Loan can be foregone in part or whole at any time or via will Investment bonds are ideal trust property Regular withdrawals for loans Assignment of benefits
Discounted Gift Trusts More rigid than loan/gift and loan structure Income must be paid as per the trust deed Can escalate or be deferred Set in stone at outset Primary right is income provision for the settlor for life or until trust funds are exhausted Discount given to reflect return of funds to estate Should be evidenced by underwriting Discount for Peter and Linda c50% at normal rates taking 4% income Bare or discretionary basis PET v CLT Foregoing the income Actuarial valuation required Further PET or CLT
Order and timing of gifts Example Client dies 15 Nov 2021 CLT of 150,000 was made in 20 November 2008 PET for 250,000 made in August 2015 fails because within 7 years of death CLT within 7 years of PET date When calculating the IHT due on the PET, the CLT made in 2008 will reduce NRB and affect the amount of IHT payable on the PET
14 Year Rule Example 325,000 NRB - 150,000 CLT = 175,000 reduced NRB 250,000 PET - 175,000 NRB = 75,000 chargeable 75,000 x 40% IHT rate = 30,000 IHT payable Taper relief @ 80% - 24,000 IHT due on failed PET = 6,000
Using your Will NRB discretionary trust Less popular since transferrable NRB introduced in 2007 Still useful for More complex family structures eg, 2nd marriages Vulnerable beneficiaries Care home fee impact on the estate of the survivor Increasing asset value Property Held as tenants-in-common Half to children on first death Not accounted for in any care fee assessment for the survivor
Dont waste your RNRB RNRB = 175,000 per RNRB = 175,000 per person person via Will PETER LINDA EST ATE 1.25M SHARE 1.105M SHARE 1.105M SHARE 1.25M SHARE 1.105M SHARE 2.21M TOTAL Lose 250,000 RNRB so extra IHT of 100,000 Lose 105,000 RNRB so extra IHT of 42,000
Lifetime gifting RNRB = 175,000 per RNRB = 175,000 per person person via Will PETER LINDA EST ATE 1.105M SHARE 1.25M SHARE 125,000 CLT 1.105M SHARE Discretionary Trust 1.25M SHARE 0.980M SHARE 125,000 CLT 0.980M SHARE 1.96M TOTAL Full RNRB retained 42,000 IHT saving
The hesitant donor Not sure/reluctant to make gifts Loss of access Unsure as to how to make gifts at the current time Insure any exposure Fixed term or whole of life Mix and match Make some gifts and insure the balance Review periodically
Dont forget your pension 2015 changes to death benefits Ability to pass pension savings through the generations with no IHT to pay Bloodline protection Ensure nominations are current
Case study 3 Linda widowed, 80 House worth 500,000 (half to children on Peter s death) DB pension and State Pension should be sufficient to cover expenditure Savings (all ISAs) 450,000 Other assets 35,000 Peter s pension 600,000 Objective: to mitigate as much IHT as possible
Case study 3 IHT liability = 985,000 - 825,000 = 160,000 x 40% = 64,000 Options More gifts Some of the other assets CGT if > 6,000 on some assets 7 years, possible access required Invest in BR assets Outside estate after 2 years Higher risk
Case study 3 Also Ensure pension nomination up to date
Proposed changes Office for Tax Simplification (OTS) Tasked by Chancellor to Identify opportunities and develop recommendations for simplifying IHT from both a tax technical and an administrative standpoint. First report published late 2018 Second published in July 2019 Historically more than 50% of OTS recommendations have become legislation
Proposed changes First report recommendations Reduce paperwork burden c.50% of deaths require completion of paperwork Only c.5% give rise to tax Implement fully integrated digital system including the ability to complete and submit a probate application online Introduce a very short form for the simplest estates, remove burden entirely for other estates Remove unnecessary stress and work at a difficult time
Proposed changes Second report recommendations Replace current allowances with a new personal gifts allowance Review gifts out of normal expenditure Gifts out of estate after 5 rather than 7 years No longer brought back into calculations once 5 years has expired ie, no 14 year rule Abolish taper relief Term life policies to pay out IHT free in any event NRB no longer to be applied to lifetime gifts in chronological order but firstly proportionately across all lifetime gifts and then against the estate
Proposed changes Other recommendations Across Party Parliamentary Group (APPG) Recommendations including:- Replacement of NRB and RNRB by Death Allowance Abolition of rebasing CGT base cost on death Removal of current framework and replace with an annual gifting allowance of 30,000 Excess gifts taxed at 10% and not added back onto estate on death for calculation purposes 10% applied following death to estate in excess of death allowance rising to 20% where > 2m Compulsory reporting of gifts > annual exemption 10% tax on pension funds remaining on death unless paid to spouse/civil partner
And finally The good news Inheritance planning increasingly important among the mass affluent Complex family structures Complexities of devising strategies requires quality advice And captures multiple generations Good platform structure is ideal for managing the strategy
Thank you for your attention Any questions? This document is for general guidance and for use by professional advisers only. Unless stated otherwise, any opinions expressed are our own or based upon our own interpretation of relevant rules and regulation at the time. This document is for information purposes only and does not, and is not intended to, constitute financial advice. "Transact" is operated by Integrated Financial Arrangements Ltd. 29 Clement's Lane, London EC4N 7AE. Tel: (020) 7608 4900 Fax: (020) 7608 5300. (Registered office: as above; Registered in England and Wales under no. 3727592). Authorised and regulated by the Financial Conduct Authority (entered on the Financial Conduct Register under no. 190856).
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