Making financial Gifts during your lifetime can help reduce the impact Inheritance Tax (IHT) poses on your estate and maximise the wealth that your loved ones end up inheriting. However, with so much at stake, you want to ensure you are making the best decisions possible. 

IHT, Gifts, taper relief, and taxing regulations can be difficult areas to navigate. In this guide, we’ll explore all you need to know about IHT taper relief and how you can use this sliding scale to your advantage.

 

What is IHT taper relief? 

 

IHT taper relief explained in its simplest form is a tax reduction that applies to Gifts if a donor dies between three and seven years after making the transfer. To better understand taper relief for IHT, we must first look at the 7 year rule. 

When you make a Gift of any value to an individual, this is known as a Potentially Exempt Transfer (PET). If the donor survives for seven years after making the Gift, the PET no longer forms part of their estate and, therefore, no IHT is due.

If the donor dies three years before making the Gift, the transfer is subjected to the full IHT rate of 40%.

 

However, if the donor’s death occurs between three and seven years after making the Gift, the value will be taxed on a sliding scale known as taper relief. If the donor dies within these timeframes, the PET becomes a Chargeable Lifetime Transfer (CLT).      

To help illustrate this sliding scale, we’ve created an IHT taper relief table down below:

Number of years between Gift and death	Rate of tax relief	Inheritance Tax Due
Less than 3	0%	40%
3 to 4	20%	32%
4 to 5	40%	24%
5 to 6	60%	16%
6 to 7	80%	8%
7 or more	100%	0%

 

Who can benefit from taper relief? 

 

Anyone who makes a Potentially Exempt Transfer can benefit from IHT taper relief rates.

To qualify for IHT PET taper relief, the Gift must sit outside the donor’s nil-rate band, which is a maximum of £325,000 for individuals or £650,000 if a transferable threshold applies.

However, taper relief only applies when the benefactor lives for an additional three years after making the Gift but dies before the seven-year threshold.

 

What to consider 

 

There are a few considerations that you should take into account when evaluating IHT tapering relief. More specifically, you should consider that: 

• You can only apply IHT taper relief on Gifts 
• Taper relief is only applied to Gifts made in the last seven years if they surpass the personal IHT allowance or nil-rate band 
• As of the 2022/23 tax year, the personal allowance for individuals is £325,000 or £650,000 if the allowance has been transferred by a spouse 
• Gifts no longer form part of your estate or IHT taper relief HMRC calculations seven years after they were Gifted  
• Gifts use up your IHT allowance in the chronological order they were made and before any assets or property in your estate are included

 

Gifts and exceptions 

 

There are certain exceptions to the 7 year rule which are not subjected to tax, for example:

 

Gifts at weddings 

You can make tax-free Gifts for wedding celebrations of up to £5,000 for children, £2,500 for grandchildren, or £1,000 for friends or relatives.

 

Transfers between spouses

Regardless of their value, Gifts between spouses or civil partners during a marriage are also exempt from Inheritance Tax.

 

Small Gifts 

Gifts that do not surpass £250 are not subjected to any Inheritance Tax. However, you cannot use another allowance on the same individual. 

Annual exemptions 

Each year, you receive a tax-free Gift allowance of £3,000 which, if unused, can be carried forward once to create a £6,000 allowance.

 

Child maintenance or education payments

Payments towards child maintenance or full-time education fees are not viewed as Gifts and, therefore, remain free of Inheritance Tax. 

 

Income expenditures  

As long as your transfers do not affect your lifestyle, you can make tax-free Gifts to individuals from your surplus income. For example, birthday or Christmas presents.

 

Examples of taper relief 

 

Let’s face it, understanding taper relief can be rather tricky at times. So, we’ve illustrated some examples down below to help understand how it all works.

 

Example A

• Mr Parker made a Gift of £50,000 to his daughter in February 2008 
• He made an additional Gift of £100,000 to his daughter in March 2011 
• He died in June of 2014 with an estate worth £100,000 

 

Taper relief IHT: Mr Parker doesn’t need to pay Inheritance Tax nor any taper relief to apply as his total Gifts plus estate do not surpass his £350,000 nil-rate band. 

Gift #1 of £50,000 + Gift #2 of £100,000 + £100,000 estate = £250,000  

£350,000 (nil-rate band) - £250,000 (Gifts + estate) = £100,000 left over as part of his allowance. 

 

Example B

• Mr Parker made a Gift of £200,000 to his daughter in January 2008 
• He made an additional Gift of £200,000 to his daughter in January 2011 
• He died in June of 2014 with an estate worth £200,000 

 

Taper relief IHT: Mr Parker’s total amount of Gifts (£400,000) was over the personal allowance threshold. He died within 6 to 7 years of making the first Gift and within 3 to 4 years of making the second Gift. 

The entirety of his IHT nil-rate band was used by his Gifts, which means the £75,000 of the Gift made in January 2011, as well as the £200,000 of his estate, are liable to IHT. 

However, the second Gift that surpasses the IHT personal allowance was made within 3 to 4 years of his death.

This gives Mr Parker a tapered IHT relief of 20% which is payable by his daughter (the donee). Therefore, instead of paying a 40% IHT rate on £75,000, she must only pay 20%, reducing the entire tax bill from £30,000 to £24,000.

Example C

• Mrs Jones made a Gift of £360,000 to her son in February 2008
• She died in June of 2014 with no estate

 

Taper relief IHT: The Gift surpasses the £350,000 nil-rate band and it was made within 2 years of Mrs Jones’ death. Therefore, taper relief is not applicable, and the recipient must pay the full rate of IHT. 

£360,000 (Gift) – £325,000 (nil-rate band) = £35,000 x 40% (rate of IHT on death) = £14,000 tax due.

 

IHT taper relief calculator 

 

If you’re struggling to calculate how much Inheritance Tax is due, you can use the IHT taper relief calculator to better understand an estate’s finances. 

Before you get started, you’ll need to know some basic information, such as:

• The value of the assets within the estate
• The ownership of the assets 
• The total value of assets in component 
• The outstanding value of debts and liabilities 
• The value of Inheritance Tax relief 
• The value of any charitable donations paid out 
• The value of the individual’s nil-rate band 
• The value of Gifts made in the 7 years before the individual’s death 

Simply input your data into the calculator to see how much taper relief on IHT you can benefit from.  

 

Final thoughts

 

Hopefully, this guide has enriched your knowledge of  IHT taper relief and the importance of estate planning before your time is due, which should not be understated, as making wise financial decisions whilst you are alive could result in thousands of pounds in savings.  

If you still need further advice regarding IHT taper relief, Efficient Portfolio works with a wealth of professionals who will be able to advise you further. Contact us today.

Podcast I’ve Been Listening to

There’s no new episode of the TRIBEathlon podcast to share this week, so I wanted to share a couple of episodes from another that I have found both interesting and useful. The Diary of a CEO has some fantastic interviews, some of which I have shared here before, but the two that have stood out for me lately are Derren Brown and Stephen Fry.

Derren Brown, the magician, mentalist and hypnotist, talks about love, happiness and the awkwardness of growing up, and there are some fascinating insights into the human psyche within.

The British treasure that is Stephen Fry talks about bipolar disorder, going to multiple schools and jail in his teens and how acting can be both a help and hinderance to a happy life.

There are many similarities between the interviews, not least both talking about the difficulty of coming out as gay. Definitely worth a listen.

TED Talk I’ve Found Interesting

If you have read former book recommendation How to avoid a climate disaster by Bill Gates, you will already know that Nuclear power is one of the safest, cleanest forms of energy – yet, to most people it might not feel that way. In her TED talk, Nuclear power is our best hope to ditch fossil fuels, Isabelle Boemeke, the world's first nuclear energy influencer and creator of the social media persona ‘Isodope’, deftly debunks the major objections to nuclear power and explains her unconventional way of educating people about this clean energy source.

What I’ve Been Reading

‘Will’ tells the incredible rollercoaster success story of Will Smith. The most successful actor of all time, based on both continuous run of no.1 movies and box office takings, has come from humble surroundings and taken his opportunities along the way. Starting out as a rapper that wouldn’t swear, he rose through the TV success of The Fresh Prince of Belair, and went onto becoming the top movie star, in a time when all his rivals were white.

Will is packed full of laugh out loud moments as well as lessons we can all learn from. Whilst his drive was unquestionable, it was his later learnings around emotions that was probably most fascinating. I also loved the way he used his unique combination of music, humour, determination and acting out to create almost no competition amongst his peers.

Quote Of the Week

"The minute we begin to think we have all the answers, we forget the questions."

- Madeleine L’Engle

Finance Theme I’ve Been Considering

The Capital Gains Tax (CGT) allowance is due to reduce from the current level of £12,300, to £6,000 from April 2023. So, if you want to make use of the higher existing CGT allowance, you will need to take action pretty soon! If you have a GIA, directly held shares or other holdings that would be subject to CGT when sold, it may be beneficial to sell these assets and place them in more tax efficient investments such as ISAs or pensions. You’ve been warned.

The Trusted Team

Have you ever looked at a cricket scoreboard? I remember taking an American friend to a test match years ago and he was utterly dumbfounded at the complexity of the display. It shows the number of overs, runs for each batman, bowlers figures plus much more!

In sport, it is difficult to know who is winning if you don’t know the score, and the same applies in business. That’s why we created The Entrepreneurial Happiness Scoreboard to help you assess whether you are winning or losing at the game of business. Its free to use, and it should highlight the areas that need the most attention to ensure you score better in the future, take the important wickets and ultimately win the match of business and life. You can complete it for free here; give it a go and let me know what you think.

It’s only natural that you wish to leave loved ones in the best financial situation possible. After countless years of hard work and savings, your money should be passed down to friends or family members in the most tax efficient way. 

However, with so many tax rules and regulations, it can often be confusing to find the best way to do so.

In this Inheritance Tax planning guide, we’ll cover a range of strategies you can adopt to make the most of tax relief and ensure your estate is handled the way you intended.

 

What is Inheritance Tax planning?

 

Inheritance Tax (IHT) planning is a way to prepare for a future in which you are no longer here.

Having a range of Inheritance Tax planning strategies in place could help you pass down assets to loved ones with minimal tax liabilities and maximum financial opportunities.

If you would like to preserve your wealth for future generations, it’s crucial that you understand your IHT planning options. 

Simply put, Inheritance Tax is a tax levied on your estate when you pass away, which, ultimately, can reduce the value of your estate once it's passed down to your beneficiaries. 

If the entire value of your estate does not surpass the £325,000 threshold, or you choose to leave everything above this figure to a spouse, civil partner, political party, or charity, for example, you are exempt from paying Inheritance Tax. 

If you want to learn how to plan for Inheritance Tax, you must first grasp the concept of the nil-rate band.

In effect, the nil-rate band refers to the £325,000 tax allowance each individual has on their estate. If you pass down your estate to a direct descendent, you can benefit from a Residential Nil Rate Band, also known as RNRB. 

 

Inheritance Tax planning for married couples

 

Married couples can benefit from increased tax benefits.

If you leave your estate to a registered civil partner, your assets won’t be subjected to Inheritance Tax. Furthermore, you can transfer your nil-rate band or residence NRB to your spouse once you pass away, raising the total tax-free threshold to £650,000.

Adopting this estate planning Inheritance Tax strategy could significantly reduce the impact IHT poses on your assets.

 

Inheritance Tax planning for unmarried couples

 

As an unmarried couple, you won’t be able to benefit from any unused transferable tax rights, which could result in higher tax charges on your estate.

Inheritance Tax planning for unmarried couples is also more complicated when you own assets together, such as residential property. 

If you are joint tenants, meaning you and your partner own the entire property, and your partner inherits your share, they must pay taxes on any amount that surpasses the Inheritance Tax threshold. 

Even if you don’t leave a will, your partner could employ the ‘right of survivorship’ which would allow them to claim the rest of the property. However, the relevant Inheritance Tax will still be applied to the assets.

 

How much IHT will I need to pay?

 

The amount of Inheritance Tax due varies according to the value of your estate. Any assets valued above the £320,000 for an individual and £650,000 for a couple nil-rate band will be taxed at a standard IHT rate of 40%.

However, if you donate 10% or more of your net value to a charity, the IHT rate is lowered to 36%.

 

Effective IHT planning

 

There is a wide range of Inheritance Tax planning options to consider when developing a strategy. We’ll cover some of the most popular Inheritance Tax planning UK methods down below.   

 

Wills 

Wills and Inheritance Tax planning are two fundamental concepts that go hand in hand.

If you want to ensure your wishes are fulfilled after you are no longer here, you’ll need to appoint a dependable executor and create a Will. To ensure your Will remains as tax efficient as possible, make sure to update it as the years go by.

 

Gifts 

You can use Gifts Inheritance Tax planning whilst you are still alive to pre-emptively reduce the amount of tax due on your assets.

Lifetime Gifts can be categorised into three groups, which include Exempt Transfers, Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers.

Exempt Transfers

Exempt Transfers are Gifts that can be made at any time, without incurring Inheritance Tax. More specifically, you can give up to £3,000 a year as a tax-free Gift.

Between spouses and civil partners, there is no Inheritance Tax to pay on Gifts, regardless of the value.

Similarly, you can make tax-free wedding Gifts, which include up to £5,000 for children, £2,500 for grandchildren, and £1,000 for anyone else. Furthermore, you can make small Gifts of up to £250 per person each year.

Potentially Exempt Transfers (PETs)

Potentially Exempt Transfers (PETs) are any Gifts that surpass the monetary values described above.

Although you don’t have to pay tax on these Gifts right away, the amount of IHT due depends on the Inheritance Tax planning 7 year rule.

If you pass away less than three years after making your Gift, the Gift will be taxed at the full 40% rate.

However, if you die within three to seven years of making a Gift, you will be taxed via a sliding scale known as taper relief.

If you live more than seven years after making your PET, the Gift no longer forms part of your estate and, therefore, no IHT is due.

Chargeable Lifetime Transfers

Finally, Chargeable Lifetime Transfers, or CLTs for short, are Gifts that are made into flexible or discretionary Trusts.

When you make a CLT, you won’t have to pay Inheritance Tax if the total number of CLTs in the past seven years has not exceeded your nil-rate band.

However, if it does, then you will incur an additional lifetime Inheritance Tax charge of 20% on the excess.

 

Trusts 

Inheritance Tax planning Trusts are a common way to increase tax efficiency, as you can transfer Gifts and assets into a legal arrangement held by Trustees.

Adding Trusts and IHT Planning into your strategy means your assets will no longer form part of your estate when you pass away.

Although IHT Trust planning can increase tax efficiency for your beneficiary, it can also limit your access to funds, so make sure you evaluate your options before going down this route. 

 

Pensions 

Pensions and IHT planning are used to pass down wealth to loved ones in a tax-efficient manner.

If you can afford to give away money from your pension income, without it affecting your lifestyle, you are exempt from paying IHT.

If you die before turning 75, the remaining benefits of your pension can be inherited by beneficiaries as a lump sum, annuity, or drawdown.

Furthermore, the funds in your pension will be IHT-free as long as they are in drawdown. All in all, it’s worth exploring pensions and Inheritance Tax planning as part of your strategy.

 

FAQs 

 

Are there any exemptions from IHT? 

Individuals who work in high-risk environments, such as armed forces, police, paramedics, firefighters, and humanitarian aid workers, are exempt from paying IHT if they pass away during service.

Similarly, if they sustained injuries during service that eventually lead to their death, they may also be exempt from IHT.

 

What happens if I inherit my parent’s estate?

When you inherit your family home, you are typically looking at a tax-free threshold of up to £500,000.

However, if the value of the estate exceeds this figure, you will have to pay the standard 40% Inheritance Tax Rate on the excess.

 

What if my partner died years ago?

Even if your partner died years ago, you would receive the equivalent percentage of their unused allowance.

For example, if your partner passed away a few years ago and only used 25% of their allowance at the time, you would receive an additional 75% of their threshold in current allowance terms. Therefore, you would receive 75% of their £325,000 allowance.

 

What is BPR in IHT planning?

Business Property Relief, or BPR for short, can also form part of your IHT planning strategy if your estate includes any businesses or business assets. Depending on the type of business assets you own, you can claim IHT relief at 50% or 100%.

 

What if we were tenants in common?

If an unmarried couple are tenants in common, the living partner who inherits the share of the property would still be subjected to IHT if the value of that share surpasses the nil-rate band. 

What do I do if I think HMRC has made a mistake with my IHT?

If you think there has been a mistake, you can make a direct claim to HMRC or seek financial advice from a professional.

Will IHT affect my business?

Ultimately, the amount of IHT due depends on the nature of your business assets, therefore it’s best to seek Inheritance Tax planning advice to see if you qualify for Business Property Relief.

 

Final thoughts

 

We hope you have found this IHT planning guide useful and that you have a better understanding of how to leave your loved ones the best legacy possible.

There are countless options at your disposal, so make sure to plan ahead to maximise your opportunities for tax efficiency. 

If you think you could benefit from some Inheritance Tax planning advice, Efficient Portfolio works with a wealth of professionals and financial advisers who will be able to guide you further on this topic. Contact us today.

Throughout your lifetime, you may feel inclined to share your wealth with friends and family. However, making large Gifts to loved ones can often come with even larger tax implications.

There are numerous rules and regulations to consider before you make a transfer of value, so it’s important to be informed before you make any important decisions. 

An IHT Potentially Exempt Transfer is a great way to ensure your Gifts are received as you intended. In this blog, we’ll explore what they are and how they can be used to your advantage.

 

What is a Potentially Exempt Transfer?

 

A Potentially Exempt Transfer (PET) is a lifetime Gift with the potential to be free of Inheritance Tax (IHT). These transfers of value encompass Gifts such as property, money, and possessions. 

There is no Potentially Exempt Transfer limit when it comes to the value of these Gifts. PETs can be made to any individual and at any given time, however, they must follow the 7 year rule in order to be exempt from Inheritance Tax.

 

The 7 year rule

In essence, there is no IHT to pay on Gifts of any value if the benefactor survives seven years after making the Gift. This is known as the 7 year rule.

If the benefactor passes away three years before making the Gift, the value will be taxed at a standard rate of 40%.

However, if they die between three and seven years, the transfer will be taxed on a sliding scale known as the Potentially Exempt Transfer taper relief.

 

Exceptions to the rule

As with most financial exchanges, there are exceptions to Potentially Exempt Transfer rules. More specifically:  

1. Civil partnerships and marriage - transfers of any value between civil partners or married couples do not count as Gifts and therefore they are not subjected to Inheritance Tax in the UK.
2. Annual exemption - each year you have a tax-free Gift allowance of £3,000 and, if unused, you can carry this forward once to benefit from a £6,000 allowance.
3. Small Gifts - each year you can make small Gifts of up to £250 to different individuals without having to pay any tax. 
4. Gifts to political parties and charities - donations and Gifts made to political parties or charities are exempt from Inheritance Tax. 
5. Child maintenance or education payments - if children are under the age of 18 or enrolled in full-time education, transfers issued by parents for child maintenance or education matters will not be regarded as Gifts or subjected to Inheritance Tax. 
6. Income expenditure - you can make regular tax-free Gifts to individuals from any surplus income you acquire as long as these transfers do not affect your lifestyle. 
7. Wedding Gifts - as a parent, you can Gift your children up to £5,000 as a wedding or civil partnership Gift. Grandparents are given a £2,500 tax-free Gift allowance and Gifts to other relatives or friends have a tax-free allowance of up to £1,000.

 

When is a PET chargeable?

As outlined by the 7 year rule, Potentially Exempt Transfers are only chargeable when the benefactor passes away within seven years of making the Gift. Therefore, there is no IHT to pay at the immediate moment. 

Similarly, a PET is only chargeable when the Gift surpasses the £325,000 tax-free threshold of the transferor.

So, when it comes to a chargeable Potentially Exempt Transfer who pays the tax? The recipient will need to cover the costs incurred by Inheritance Tax.

 

How to make a Potentially Exempt Transfer

To make a Potentially Exempt Transfer, you simply need to make a Gift of any value to an individual. This Gift can be made at any time and may consist of property, money, or possessions, such as jewellery or antiques.

There are some additional conditions outlined by the Potentially Exempt Transfer HMRC guidelines. For example, the transfer must be made to another individual or specified trust and the Gift must be made by an individual on or after March 18th of 1986.

 

What’s the difference between Exempt Transfers and Potentially Exempt Transfers?

 

Exempt Transfers are those that are immediately free from Inheritance Tax, such as any Gifts from one spouse to another. Similarly, any Gifts and donations made to charities or political parties are also exempt from Inheritance Tax. Regardless of their value, there is no need to declare Exempt Transfers to HMRC. 

On the other hand, a Potentially Exempt Transfer is a Gift of any value, gifted to any kind of individual that has the potential to become free from Inheritance Tax.

More specifically, the Gift must abide by the Potentially Exempt Transfer 7 year rule in order to be exempt from any taxes. In other words, the benefactor must live for an additional seven years after making the Gift to make the most of tax benefits.

 

What’s the difference between Potentially Exempt Transfers and Chargeable Lifetime Transfers?

 

So, what are Potentially Exempt Transfers in comparison to Chargeable Lifetime Transfers?

Potentially Exempt Transfers are only chargeable if the donor passes away within seven years of making the Gift.

Chargeable Transfers encompass all transfers that are instantly chargeable to Inheritance Tax. For example, any Gifts established into Trusts that surpass an individual’s nil-rate band are instantly subjected to a 20% IHT fee.

 

What’s a failed Potentially Exempt Transfer?

 

A failed PET occurs when the benefactor passes away within seven years of making the Gift.

When this situation arises, there will be a certain amount of Potentially Exempt Transfer IHT due to pay. How much IHT the PET incurs will depend on the value of the Gift and when the donor died.

 

FAQs

 

Who pays tax on Potentially Exempt Transfers?

So, who pays Inheritance Tax on Potentially Exempt Transfers? If the value transferred surpasses the benefactor’s nil-rate band, the recipient of the Gift is liable for paying Inheritance Tax.

 

Do I have to declare a Potentially Exempt Transfer?

Yes, if the Potentially Exempt Transfer fails and Inheritance Tax is due, you’ll need to report this to HMRC.

 

How to declare a Potentially Exempt Transfer? 

To declare a Potentially Exempt Transfer, you will need to fill in the IHT100 form located on the HMRC website. 

 

Is a Gift a Potentially Exempt Transfer?

Any Gift has the potential to become an Exempt Transfer when you take into consideration the Potentially Exempt Transfer 7 year rule.  

 

How much money can you Gift a family member tax-free?

It depends on your relationship with the family member and the circumstances. Generally speaking, you can make Gifts of up to £3,000 each year without having to pay any taxes. 

 

Are Gifts to children for university fees Potentially Exempt Transfers?

Any transfers made towards your child’s maintenance expenses and education fees are not considered to be Gifts and, therefore, are free from Inheritance Tax.

 

Do I notify HMRC of a Potentially Exempt Transfer?

No, unless you come across a failed Potentially Exempt Transfer you are not required to notify HMRC of the Gift.

 

Final thoughts

 

After exploring the potential of an Inheritance Tax Potentially Exempt Transfer, there is no denying that planning ahead is imperative. If you want to make the most of your financial opportunities, we recommend you start thinking about estate planning as soon as possible.

Navigating tax rules and regulations can be rather complicated, so it’s worth having some financial guidance along the way.

Making Gifts to loved ones earlier rather than later can help reduce the impact an Inheritance Tax Potentially Exempt Transfer poses on your estate and possibly result in thousands of pounds in savings.  

If you still need advice regarding the use of an IHT Potentially Exempt Transfer, Efficient Portfolio works with a wealth of professionals who will be able to advise you further. Contact us today.

Estate planning often seems like a daunting task. Although nobody likes to think about what could happen down the line, making financially sound decisions earlier on in life can help you leave a greater legacy behind for loved ones.

 

If you have large financial assets that you would like to give, you can reduce the burden of Inheritance Tax by making gifts earlier on in life. If you’re wondering what is the 7 year rule in Inheritance Tax and how you can use it to your advantage, keep reading, we’ll explain everything.

 

What is Inheritance Tax?

 

Also known as IHT for short, Inheritance Tax is a charge issued on assets, like property, possessions, or money, that have either been inherited or received as a gift. 

Typically, this one-off tax bill is charged at a rate of 40%. However, if you donate 10% of your estate to charity, your IHT liability is reduced by 4% to 36%. 

If the amount gifted does not surpass the nil-rate band of £325,000 per individual, your financial gift will not be subjected to Inheritance Tax. Couples who are married or in civil partnerships can pass on their tax-free allowance to their spouse or civil partner, bringing the total limit per couple to £650,000. 

In addition to this, there is now a Residential Nil Rate Band (RNRB) enabling property to be passed down to children or other direct descendants. This threshold increases every year in line with inflation rates based on the Consumer Price Index (CPI). From 2017-18 onwards, there is an additional transferable main RNRB of £100,000, which is set to increase by £25,000 each year until 2020-21. After this, the threshold is raised in accordance with the CPI. This will eventually bring the total IHT allowance for couples to £1 million. Moreover, the nil-rate band, which was frozen since 2009 will increase in line with CPI in the 2021-2022 tax year. 

 

What is the 7 year rule in Inheritance Tax?

 

So, what is the 7 year rule in Inheritance Tax? As the name suggests, this rule in Inheritance Tax comes into play after you make a financial gift to someone and live for the subsequent 7 years.

If you pass away before the 7 year mark, the gift will fall under your nil-rate band, where it could be subjected to tax if it surpasses your tax-free allowance.

Regardless of your gift’s value, the beneficiary becomes exempt from Inheritance Tax if the benefactor lives past the 7 year threshold.

Under these circumstances, your gift becomes a Partially Exempt Gift or Potentially Exempt Transfer (PET). However, in order to comply with the 7 year rule in Inheritance Tax, the gift must be issued from an individual rather than an established Trust or business.

 

Who does it apply to?

 

The 7 year rule in Inheritance Tax applies to any gifts received whose value surpasses the annual gifting allowance.

Each year you can give away up to £3,000 in gifts without having to pay Inheritance Tax. If you haven’t used up your allowance from the previous year, it can roll over once to a maximum of £6,000. However, there are other exceptions to this rule, such as wedding gifts from parents and grandparents, which fall outside of taxation even if the benefactor dies before the 7-year mark. 

Gifts that surpass the allowance and nil-rate band of your estate, could be subjected to IHT or, adversely, the 7 year rule.

 

What is taper relief?

 

Taper relief is a sliding scale of percentage reduction that can be applied when the benefactor dies before the 7 year mark.

If the donor survives for 3 years or more after giving the gift, the amount of tax relief will be adjusted appropriately.

As long as it is affordable, it could be wiser to give gifts earlier than later, as you could reduce the amount of Inheritance Tax substantially or even eliminate it completely. 

 

Is there a 14 year rule?

 

So, we’ve explored what is the 7 year rule in Inheritance Tax in the UK, but what about the 14 year rule?

Yes, once multiple gifts within trusts come into play, these rules become a tad more complicated. If you add a gift into a Trust, you create instant Inheritance Tax bills and these series of gifts can accumulate over the years.

In this instance, gifts made up to 14 years before your death may be subjected to Inheritance Tax, therefore it’s worth speaking to a professional advisor before you start to add these to your Trust.

 

Final thoughts

 

Individuals of all ages should take estate planning seriously and start planning their future. In fact, the earlier you start, the better.

With a greater understanding of the 7 year rule In Inheritance Tax and estate planning as a whole, you can reduce potential risks and maximise financial opportunities. 

If you’ve read through this article and you’re still asking yourself what the 7 year rule in Inheritance Tax is, at Efficient Portfolio, we work with a wealth of professionals who will be able to advise you further on the topic. Contact us today.

Life insurance is so important and valuable that people often think having two policies must surely be better than one, but can you have more than one life insurance policy? In short, yes you can. There are no limits as to how many life insurance policies you can acquire. 

Sometimes having multiple life insurance policies can help cover financial commitments in a range of different scenarios. However, mixing and matching policies isn’t always the best idea. In this blog, we’ll explore the benefits and logistics of a life insurance policy in greater detail.

What is a life insurance policy?

Life insurance can bring peace of mind by keeping you and your family protected if the worst were to happen. It can act as a safety net for loved ones, help cover living expenses, reimburse medical bills, and even pay off outstanding debts. 

Some individuals like to take out multiple policies to ensure all aspects of their financial responsibilities are covered. Although you can layer multiple types of insurance policy, it’s important that you evaluate your decision thoroughly as it might not be the most efficient way to have insurance cover. 

Different types of insurance policies

There’s a type of insurance to suit every stage in your life. Picking the right type of coverage can mark the difference between disaster and diversion. 

• Income protection: insurance pays out part, or all, of your lost income.    
• Mortgage protection: insurance pays off your outstanding mortgage payments.
• Life insurance with critical illness protection: insurance pays a lump sum upon the diagnosis of a critical illness as outlined in the terms and conditions. 

The best way to find out which type of insurance is best suited to your needs is by seeking out professional advice from an Independent Financial Planner. 

How many life insurance policies can I have?

Legally speaking, there are no limits as to how many life insurance policies you can purchase in the UK. You can acquire as many as you need to cover outstanding financial commitments at the time of your passing or whenever you need them most, if your policy provides funds during your lifetime. 

However, life insurance companies won’t advise you to take out more policies than necessary. Having multiple policies may not be cost effective and may not truly meet your needs, so it's unlikely that you’ll be approved for further coverage if you already have multiple life insurance policies. You should only take out multiple policies if you need to cover an array of financial obligations.

Why would I want or need multiple life insurance policies? 

You never know what life may throw your way and, as we get older, our responsibilities and goals inadvertently change. You may find that your current policy no longer suits your needs or that you’re simply in need of more coverage. 

Overall, individuals acquire additional life insurance policies when they need more financial protection. If you have a wide range of financial liabilities, you may need more than one policy to cover your obligations or, adversely, you may wish to review your existing policy to include more coverage and benefits. 

For example, let’s say you are the sole breadwinner in your family, and you’ve recently purchased a home. Do you need life insurance for a mortgage? If you don't have enough savings to cover your mortgage commitments, it may be wise to put a safety net in place.

Generally speaking, there are numerous reasons as to why some people choose multiple life insurance policies rather than one. Ultimately, it's all about finding a policy, or several policies, that fits your bespoke needs.

Why should I avoid getting more than one life insurance policy? 

Taking out multiple life insurance policies also means paying multiple premiums every month. It may be counterproductive to pay three different premiums when you could purchase a more comprehensive policy instead. 

Another drawback of having multiple policies is that you may be subjected to a medical examination for each life insurance policy. Not all exams are invasive, however, the process itself can be rather time-consuming. 

Finally, you could also find managing various premium payouts rather confusing. If you miss one of your premium payments, you could accidentally cause one of your policies to terminate.

Other FAQs about life insurance

We’ve already addressed a few commonly asked questions about life insurance policies, but below are a couple more:

How does life insurance work? 

After reaching out to an insurance provider and agreeing to a contract, you will pay a monthly premium in exchange for your policy. If you pass away within the terms of the contract, a death benefit, or lump sum, will be distributed to your beneficiaries. 

How much is life insurance?

Depending on your age, health, level of coverage, and length of your policy, the cost of your monthly premium will vary. 

How much life insurance do I need?

Overall, different individuals have different goals. The amount of life insurance a person needs is dependent on a number of factors.

You may want to leave a legacy behind for loved ones or you may simply need enough coverage to pay off your mortgage. Evaluate how many financial commitments you have and whether you can cover these in the event of your death. 

You should also consider whether you can afford to be unpaid during your lifetime. For example, if you were to fall ill, how would you handle your responsibilities? These are important questions that can help determine how much insurance you need. 

As a couple, should we consider joint life insurance policies?

Joint life insurance policies can be appealing because you only need to pay one premium to cover two parties. Although you may be saving money on a monthly basis, it could be more costly in the long run. 

Typically, joint life insurance policies will only pay out once. This leaves the remaining partner at a disadvantage, as they will need to seek out a new policy at a later stage in life and they may be faced with higher premiums. 

Another disadvantage of a joint policy is that you will both be faced with inflated premiums if one is deemed high risk or has less desirable health. For example, if your partner is a smoker and you’re not, this will affect your premiums. 

Can I get multiple life insurance policies with different providers?

Yes, of course. You don’t need to use the same provider for all of your policies. Make sure to compare quotes from different insurance providers to secure the best deal possible.

Can you change life insurance policies?

Yes, you can change life insurance policies. However, you may be faced with cancellation fees and higher premiums, so make sure you are confident in your decision. 

Final thoughts 

All in all, a comprehensive life insurance policy can offer you and your loved ones the peace of mind you seek. It’s an excellent way to ensure your family and commitments are cared for, even when you are no longer here. 

Layering multiple policies can be beneficial if your circumstances require that level of financial protection but, more often than not, you can receive the same benefits with a single policy. 

If you still need any advice regarding life insurance policy, Efficient Portfolio works with a wealth of professionals who will be able to advise you further. Don’t hesitate to contact us today.

With ever increasing life expectancy, we’re all giving far more serious consideration as to how our finances affect our retirement. Nobody wants to live out their golden years worrying about money, therefore it’s crucial to understand your pension plan and its features before you reach this important milestone. 

Now more than ever, pensioners have a great deal of choice on how and when to draw their funds, but with this freedom comes a great deal of tax implications. To help you better understand your f​​lexible retirement income, we’ve covered your most pressing questions below.   

What is flexi access drawdown?

Also known as flexible retirement income or pension drawdown, a flexi access drawdown is designed to give individuals more freedom and choice when investing and withdrawing their retirement funds.

Every new drawdown product created since April 2015 offers individuals a flexi access drawdown. This pension feature was specifically designed to provide a continuous income during your retirement years and it offers retirees a more flexible way to manage their finances. You can take up to 25% of your pension pot as a tax-free lump sum and the rest will be taxed according to your marginal rate.

Previously, pensioners were limited to a capped access drawdown. The main difference between capped and flexi access drawdown pensions is that the former has a limit on the total amount you can withdraw from each pension year.

How does flexi access drawdown work?

As soon as you turn 55, you can begin withdrawing cash from your fund. Thanks to the flexi access feature, you can decide how much, or how little, you would like to draw out during your retirement. 

You can withdraw up to 25% of your pension pot tax-free, either in a lump sum or smaller portions. The rest of your pension pot remains invested, allowing your finances the chance to grow. You are also granted a certain degree of choice when it comes to allocating your investments. 

It’s important to note that your flexi access drawdown is not infinite and it only applies whilst there is money in the pot. You'll need to think about your investment and withdrawal choices carefully. As a set retirement income is not guaranteed, you’ll need to consider how much risk to take with your investments and how often to withdraw from the pot. 

It’s up to you to choose how the rest of your money is invested, however, it’s advised that you plan your withdrawals and match any remaining investments to your level of risk tolerance.

What are the rules?

The primary rule to consider when examining the flexi access drawdown is that you’ll be charged under your usual tax bracket after receiving your initial 25% tax-free lump sum.  Any withdrawals after this drawdown limit could be taxed as earnings. 

Another key rule associated with the flexi access drawdown is that you’ll be subjected to contribution limits after you withdraw more than your 25% tax-free allowance. Therefore, you’ll only be able to contribute £4,000 per year, rather than £40,000.

What’s the difference between flexi access and capped drawdown?

It’s easier to think of the flexi access drawdown scheme as the updated version of the capped drawdown pension. The flexi access drawdown was first introduced in April 2015, and, unlike its capped counterpart, this new pension feature did not require a set minimum income from other sources.

Any individuals who wish to set up a new drawdown pension after April 6 2015, are automatically converted to a flexi access drawdown scheme. The flexi access drawdown granted individuals more freedom and fewer limitations when it came to withdrawing their pension. 

The benefits of flexi access drawdown

Some benefits of the flexi access drawdown scheme include: 

• You can begin withdrawing funds from the age of 55
• You can withdraw your tax-free allowance in staggered portions or a single lump sum 
• You can decide where your money is invested and continue to make contributions to your pot until the age of 75 
• You are in charge of your investments with a flexi access drawdown meaning you can ensure funds last if you are wise with your choices 
• It’s a beneficiary flexi access drawdown, allowing you to give your pension benefits to a loved one or charity if you pass away before releasing the entire pot

The downsides of flexi access drawdown

As with any pension scheme, there are some downsides to the flexi access drawdown, more notably: 

• Cash withdrawals will depreciate the amount you receive at the time of retirement 
• Your income is taxed as earnings, so you’ll need to be wary of what tax bracket applies to you  
• Your pension pot could fluctuate depending on your investments, so constant regulation and monitoring is needed 
• You’re not guaranteed a fixed income and you could run out of money if you withdraw too much at any given time. 
• Once you cash out more than your 25% tax-free sum, you’ll be subjected to the Money Purchase Annual Allowance (MPAA) of £4,000, meaning you can only contribute £4,000 annually, instead of £40,000.

FAQs

Flexi access drawdown is a complex topic, especially in the world of pensions and retirement planning. Below are a few of the most commonly asked questions.

Can you transfer capped drawdown pension to flexi access drawdown?

Yes, instead of exceeding your cap, you can notify your scheme and fill out a conversion form to transfer your capped drawdown pension to a flexi access drawdown. However, you should be aware that this transfer is irreversible. 

How does flexi access drawdown affect my annual allowance?

Once you withdraw your tax-free allowance of 25%, you’ll be limited to a money purchase annual allowance of £4,000 instead of £40,000.

Do I pay Income Tax on pension drawdown?

Yes, any income you receive after the initial 25%, which is tax-free, will be taxed as earnings per that tax year. If the total value of your pension savings is higher than the lifetime allowance (£1,073,100), you may be subjected to further tax charges.  

Can I continue contributing to a pension if you move into drawdown?

Yes, you can continue to contribute as long as you are under the age of 75.

Final thoughts

All in all, the flexi access drawdown gives individuals a great deal of freedom, choice, and versatility when it comes to managing their pension pot. This model provides more control over investment decisions and greater flexibility regarding cash withdrawals.

When you evaluate the difference between capped and flexi access drawdown schemes, the latter can offer more benefits than drawbacks. However, we strongly recommend you have your individual needs assessed by a professional, as every situation differs.  

If you are still in need of some advice on flexi access drawdown or anything to do with pensions, Efficient Portfolio works with a wealth of professionals who will be able to advise you further. Contact us today.

Planning for your retirement is all about knowing what pension options are available to you and creating a strategy that suits your unique needs. A defined contribution pension plan is one of the most popular schemes available, so let’s explore it in further detail. 

What is a defined contribution pension plan? 

Defined contribution pensions can be set up independently with a private pension provider or by an employer. Nevertheless, professional guidance is advised, as your pension should be matched to your tolerance to risk and unique needs. 

 

The amount that these pensions pay out essentially depends on how much you contribute towards the plan, how well your investments perform, and how long you spend contributing towards your pot.  

Types of private pension schemes 

Generally speaking, there are two types of private pension schemes: defined contribution pensions and defined benefit pensions.  

Nowadays, employers will generally provide new employees with qualifying defined contribution schemes, but there may be some people who still hold legacy defined benefit schemes. These are also referred to as ‘average salary’ pensions, as you receive a guaranteed retirement income dependent on your past salary and how long you’ve worked for the employer. However, defined benefit schemes no longer exist for new contributors.  

Adversely, the total pot in defined contribution pensions is dependent on a wide range of factors. You’ll need to consider how much you contribute, how frequently you contribute, whether your employer contributes, how well your investments perform, and how you choose to access your pension pot. 

What’s the difference between a defined contribution and defined benefit pension?

Overall, the main difference between a defined benefit pension vs defined contribution pension is that the former guarantees you a fixed income and the latter is dependent on the total amount you pay in and the performance of your investments. 

However, it’s worth noting that employers never offer defined benefit pensions nowadays as they are no longer available. Therefore, most individuals will have a defined contribution pension which can offer more flexibility.  

The benefits of a defined contribution pension

There are various advantages to the defined contribution pension scheme, more specifically: 

• You have higher flexibility when it comes to accessing and withdrawing your funds 
• You can contribute until the age of 75 and make the most of the tax relief benefits  
• Your family members can inherit your pension when you pass away 

The downsides of a defined contribution pension

Like any pension scheme, a defined contribution pension will have a few downsides, more notably: 

• Your pension pot can run out and an annual income is not guaranteed unless you save up adequately 
• Your pension pot is dependent on the performance of the stock market and vulnerable to market downfalls. 
• You are unable to access any funds until you are aged 55 or higher
• Only the initial 25% you withdraw from your pension is tax-free, the rest will be taxed as income

FAQs

Defined contribution pensions can be a complex topic, so below we have listed a few commonly asked questions:

What makes a good defined contribution pension scheme?

The best kind of defined contribution pension scheme has minimal management charges, low transfer fees, and additional benefits. 

How much should I be contributing to my defined contribution pension?

It’s up to you how much you want to contribute, however, the more money you contribute towards your pension pre-retirement, the more you will accrue in your final pension pot. As a general rule of thumb, between 10% to 15% of your annual income should go towards your pension.

However, you can’t contribute more than you earn in a year and there is a pension contribution cap of £40,000 PA. Similarly, all pension holders are subjected to a Lifetime Allowance, which is the maximum amount you can contribute towards your fund before getting hit by high taxes.   

Can I move a defined contribution pension?

Yes, there should be no issues when it comes to transferring funds across defined contribution schemes, but it’s important to check for specific restrictions with your provider and weigh up the pros and cons of losing any benefits.

Can I add funds to a defined contribution pension pot?

Of course, it’s important to maximise your pension, just make sure you contribute within the guidelines outlined by your pension provider. 

What happens when a defined contribution pension provider goes bust?

Don’t worry, most pensions in the UK are protected by the Pension Protection Fund (PPF). If your pension provider goes bust, and you’ve already started accessing your funds, you’ll be awarded 100% of the compensation you are entitled to. Having an expert by your side can ensure you select robust schemes and benefit from performance monitoring. If the professional believes your scheme is in jeopardy, you can switch to another. 

Can you increase the contribution of your defined pension pot?

Most schemes will let you increase or decrease your monthly contributions to a level that you feel comfortable with.

How do I know if my pension is defined benefit or defined contribution?

The best way to know what kind of pension plan you hold is by asking a professional to assess it for you. 

Final thoughts

There is no understating the importance of retirement planning and maximising your future financial opportunities. Apart from the major tax benefits, the most important advantage of a defined contribution pension plan is that you can decide how much money you would like to save for your future. 

You can make your pension part of your estate planning strategy so family members will inherit your legacy if you were to pass away. Plus, you have higher flexibility when it comes to withdrawing your funds. When it comes to retirement planning, it’s crucial to know the ins and outs of your options.  

Still need further retirement planning advice? Efficient Portfolio works alongside a wealth of professionals that can provide the advice you need. Contact us today and a member of our team will be in touch shortly.