Protecting your assets when passing
them on

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Inheritance tax (IHT) is one of the least popular taxes in the UK. While it's considered a ‘tax for the rich’, the reality is that frozen inheritance tax limits, along with the UK’s house price boom, has drawn more people into this net than you might expect.

The Government raised nearly £4.7 billion from inheritance tax between 1 April 2015 and 31 March 2016 – the latest available figures from HM Revenue & Customs – a 22% increase on the £3.8 billion received the previous year.

HMRC said the increased rate of annual growth would have been affected by “a higher number of deaths in the months leading up to 2015-16 compared to previous years”.

However, if your estate is going to be one of those affected, there are many ways you can mitigate this unwelcome tax, provided you take the right advice.

The key is to make a will and ensure you keep it updated to reflect changes in your circumstances over time. For example, if you have children, grandchildren, get an inheritance yourself, a lottery win – anything that will have an impact on the value of your total assets should be a prompt to update your will accordingly. This will help you identify if you are likely to have an inheritance tax liability for your estate when you die.

At present, the inheritance tax nil rate band as it's known – the amount below which you have no inheritance tax liability – is £325,000. If you are married, and your spouse or civil partner dies before you, but does not use any of their nil rate band, this will also pass to you on their death. So you can have as much as £650,000 – or £325,000, plus whatever remains from their estate that has not been used.

There is also an additional threshold which allows you to pass your property to direct descendents and will be worth as much as £175,000 per person by 2020/21. In short, by this stage you could pass as much as £1m, including a property free of inheritance tax, providing you have children. No children, no additional threshold.

However, parents are increasingly dictating how the money they leave to their children can be used. One in three do not want their wealth to be squandered by their children and a quarter of those over 55 want to ensure their family money is not lost if they get divorced, according to a recent survey from Prudential.

Some go even further – one in eight specify what their legacy is actually used for, while one in 10 go as far as stipulating their children must get professional financial advice when they receive their inheritance.

This interest in influencing their legacy may be one reason why there is a rise in the numbers of family trusts being used as a means of protecting wealth and passing it on to future generations.

A family trust allows you to protect your assets, which can progressively be added to the trust over time if you wish and allows you to still benefit from them throughout your life. It can, for example, take the family home out of your personal inheritance tax net, as you would no longer legally own it, but you will still be able to live there while you are alive.

You would need to appoint trustees – a move to consider carefully, because there could be significant costs involved if you want to change them. You would also need to create a Letter of Wishes to outline how you want the money in the trust to be dealt with.

The trustees have a legal obligation to administer the trust in the way you have set out and this can be continued after you die, if you wish. So if you want to be sure a child is old enough to deal with an inheritance, you can delay them getting the money.

Other reasons for using a trust to delay the payment of an inheritance might include the need to secure an investment for a period of time, such as awaiting the payment of university fees.

One other major benefit is that because the trust does not represent assets that are owned by you any longer, there is no need for the trustees to wait for probate for money to be passed on after you have died. This can significantly increase how quickly your beneficiaries can access funds, making their lives easier at what will be a very difficult time.

However, a family trust needs careful managing and advice to ensure that it's the right thing for you to do. So, speak to a solicitor or financial adviser if you are interested in setting one up for your family.

With more than 25 years of experience and over 160 advisers nationwide, AFH Wealth Management is one of the UK’s leading financial firms.

If you would like to learn more about inheritance tax, or to discuss your financial portfolio, please do not hesitate to give us a call, or fill in the enquiry form below and we'll be in touch.

This article is for generic information only and is not to be deemed as a recommendation to the individual reader. You should seek professional advice before proceeding with any course of action.

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