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Long term wealth planning in difficult times

29 Jun 2010

Credit crunch, interest rates at an all time low, banks needing to be bailed out by the taxpayer and rising unemployment – some of the many concerns we face at present.

Whilst it was important to undertake planning when times were good, it is even more important to plan well when times are tough. We need to make the most of what we have, and ensure that as much as possible passes to our families rather than the Exchequer.

Inheritance Tax (IHT) is charged at the rate of 40% on the value of your assets above the current tax free limit of £312,000. With the increase in house prices in recent years it does not take much by way of other savings and investments before your assets are within the IHT bracket. There is no IHT to pay on assets left to a surviving spouse or civil partner, so for those who are married or in civil partnerships the IHT liability is likely to be on the survivor’s death.

Significant IHT savings can however be achieved if appropriate planning is put in place. The starting point is to ensure you have a Will. If you have a Will, you can choose who you wish to benefit when you die. It also enables you to take advantage of available tax reliefs and exemptions. In particular, it is important to ensure that reliefs attaching to any business or agricultural assets are maximised. Existing Wills should also be reviewed to take into account changes in personal circumstances and legislation.

The next step is to consider planning in respect of particular types of assets. Assets can be divided between those that are “restricted” and those that are “free”. The “restricted” assets are those which provide an income to cover living expenses or contingencies in the future, and so cannot easily be given away. The “free” assets are those you have identified as being surplus to your requirements. Identifying the “free” assets may not be easy as no one can predict, especially in the current climate, what they will need in future. A financial planning exercise can however assist.

This process may identify that your circumstances have changed since certain assets were acquired. For example, life insurance may have been taken out to enable a surviving spouse or civil partner to pay off a mortgage. That mortgage may since have been discharged but the life policy remains in place. If the surviving spouse or civil partner does not require the proceeds, it may be appropriate for the policy to be written in trust for children or other family members in order to take it out of the charge to IHT when the survivor dies.

Having identified any “free” assets, lifetime giving can then be considered. This could be by way of outright gifts, or if continued control is desirable, for example where young children are involved, family trusts can be created. Such giving can be structured to take advantage of the various exemptions from IHT and ultimately ensure the assets will not be subject to IHT on your death.

Limited IHT planning may also be achieved in respect of the “restricted” assets, including the family home.

In these difficult times it is worth spending a little time and money now to achieve substantial IHT savings for the benefit of your family in the longer term. One size does not fit all. It is therefore important to get specialist advice.

For further information contact Alice Clewes, Partner at Hay & Kilner, on 0191 232 8345 or email alice.clewes@hay-kilner.co.uk

Please note:
This article is not legal advice; it is intended to provide information of general interest about current legal issues. Please contact us to discuss how the contents of the article may affect you.