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Many of us dream of being able to leave a legacy for our loved ones; whether it is being able to pay the deposit on your grand-daughter’s first house or funding university for your grand-son. Unfortunately simply saving your hard-earned cash is not enough, as there are three risks that could cost your loved ones their inheritance: Long-term Care Fees, Inheritance Tax and Divorce. So what are the solutions?
You are allowed to give away £3000 per year without incurring any Inheritance Tax charges upon your death. Also, if you make a gift and survive for 7 years after making this, it automatically becomes exempt from IHT. The general rule is, before you begin to look at what measures you can put into place, make sure you are taking full advantage of your allowances. There are of course downsides to this, in that you lose all access and control over the money.
Potentially Exempt Gifts (PETs) are sums of money which gifted away in your lifetime, but exceed the £3000 mark. Again, if you survive for more than 7 years after making the initial gift, the sum should be exempt for IHT. However, if you do not, the gift could be subject to a 40% Tax. For some PETs are a great solution, as they are easy and have no administration costs. You also have the benefit from seeing the impact that your gift makes.
Discounted Gift Trust (DGT) are a mechanism where you effectively give up the right to your capital, but still retain the right to receive an income for the rest of your life. This is usually 5% of the total sum that you put into the Trust. Imagine that your estate is a cake. DGT allows you to give away a large portion of that cake, meaning that it leaves your estate and is exempt from Inheritance Tax. This proportion is put into a Trust and you are allowed to keep a slice.
Gift and Loan Trusts (G&L) enable you to reduce your Inheritance Tax bill whilst maintaining full access to your capital. Sadly you cannot simply give away your assets as a gift and then continue to benefit from them; if you do this, the assets which you have gifted are still liable for IHT. However, G&L is a device for legally overcoming this legislation.
This IHT planning solution allows the Settlor to invest their capital into several single policy Life Insurance Bonds or Unit Trusts which are then gifted into the possession of a Trust. These gifts are for the benefit of the Beneficiaries; usually children and grandchildren. However, it is here that this Trust differs to the others; rather than selecting a set percentage to be taken as income, the Settlor retains access to the gifted capital for the rest of their lives. The best bit is that they can specify and change this amount depending on their circumstances.
Business Property Relief is a tax relief provided by the UK Government as an incentive for investing in specific types of trading companies. If you hold assets that qualify for BPR, they will be eligible for an incredible 100% IHT relief on your interest in the business itself.
When it comes to long-term care fees, the key is to achieve the right balance between protecting your wealth for your family and ensuring that you have enough financial support to provide you with comfortable care. When your local authority carries out the means test assessment, money tied up in Investment Bonds will normally be excluded from their calculations. Not only can that, but the returns on Investment Bonds be used to provide a regular income to pay for care-fees. Investment Bonds have an element of Life Assurance with them, meaning that upon your death, the Bond will pay out a slightly more than the value of the fund. This could be put into Trust, to ensure that you are leaving something to your loved ones. The trick with Investment Bonds and Financial Planning in general, is to think ahead to the future. Invest in your Investment Bonds today; do not leave it until tomorrow!
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.