Retirement and Estate Planning – The Time is Now

We are all guilty of getting so involved in the day to day busyness of working and family life that often proper retirement and Inheritance Tax (“IHT”) planning is something that is put on a back burner to be reviewed down the line.

The raison d’être for our busy lives is often to make sure that we have the means to retire comfortably and make future provision for our spouses, children and grandchildren. A sobering thought is that without proper planning as much as 40% of the estate you have worked so hard to build up may end up in the hands of HMRC.

On this note it is NEVER too early to start your planning.

The starting point to determining if you have a potential IHT Liability that may crystallise on death is to sit down with your accountant and draft a Statement of Assets and Liabilities which effectively is a summary of everything you own after any debts have been netted off.  This list is not exhaustive but will include:

  • Your home
  • Motor vehicles
  • Other Properties owned to include Buy to Lets, Commercial Premises etc.
  • Value of shares in a limited company
  • Cash and Investments
  • Life Insurance policies
  • Jewellery and antiques
  • Furniture and chattels

If the value of your estate is below £325,000 (£650,000 in the case of a married couple), minimal Inheritance Tax Planning is required at this stage BUT we would recommend reassessing the situation every 3-5 years or if there is a one-off event such as that longed for lottery win that leads to significant growth in your estate.

Where your estate is already in excess of the IHT thresholds referred to above, we would initially assess if you qualify for any of the following reliefs:

  • Main Residence Nil Rate band – a further £150,000 or £300,000 for married couples (based on 2019/20 rates) is available for offset against the value of your home where the estate value before reliefs are applied is below £2m, so long as the home is transferred to your children or grandchildren (including adopted, foster and step-children);
  • Business Property Relief (“BPR”) may be available against shares owned in a limited company or indeed if you have premises that you own personally and are used by the company in which you are a shareholder. The availability and rate of BPR is dependent on review of your particular circumstances against specific conditions.

If there is still IHT exposure after applying reliefs, there are various options for reducing this.

These options should be considered in line with factors such as how you intend to fund your living requirements now and during retirement and how you want to split your estate on death:

  • If you have a Life Insurance policy, make sure it has been written in trust so that in the event of your death it will fall outside your estate for IHT purposes.
  • Use of non IHT friendly assets such as Cash ahead of Pension pots which fall outside your estate for IHT.
  • Lifetime transfers of assets. This option will work where you have decided who you want to receive an asset and you do not require any future income from the asset. The transfer is known as a Potentially Exempt Transfer (a “PET”) whereby the asset will only fall out of your estate after a period of 7 years has passed from the date of transfer. If the transferor dies within 3 years, IHT would still be payable at a rate of 40%. This rate is tapered down between years 3 and 7. Whilst this is often a popular method for reducing IHT exposure, we would recommend proceeding with care. Once you legally transfer title, this cant be undone so you need to be sure about your decision.
  • Trusts are increasingly becoming a popular method of setting aside cash resources for the future benefit of your descendants.  Depending on the type of trust these can reduce exposure to IHT. For example, with a discretionary trust there is flexibility for the trustees to select which beneficiaries are to benefit and when those benefits are to be provided. The gift will be treated as a PET so that if you survive for 7 years, the transfer becomes exempt. Independent Financial Advice and full consideration of all legal matters is essential before proceeding with the trust option.
  • Review of Life Insurance Cover by a qualified financial advisor. Where you have assets that you are likely to need to fund your lifestyle, lifetime transfers or locking funds in trust may not work for you. If this is the case we would suggest that consideration should be given to taking out a life insurance policy that will cover any potential IHT exposure. Again, this can be reviewed on a regular basis – as cash and other assets are utilised, the requirement for cover is likely to decrease.

Estate Planning is a complex area and there is no one “fit all” solution. Whilst this article may give you some food for thought, the best way to approach this is to arrange an appointment with your accountant to discuss your situation and put your mind at rest.

Contact Claire McElduff at this office if you have any further queries in respect of same.

Gildernew & Co. Ltd make every effort to ensure the accuracy of the information herein.   However, no reliance should be placed on any of the above without seeking independent professional accountancy, legal and/or financial advice.

Posted on August 29, 2019