Effective future planning for you and your loved ones

Published by Jo White on 10 October 2023

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When you achieve your financial goals in life, planning for your and your loved ones’ future needs special consideration, to avoid paying unnecessary tax or putting your hard-earned wealth at risk through poor planning or decision making.

Whether you have run a successful business, have worked your way up the career ladder or inherited your wealth, it is important to preserve that wealth for a secure future.

A typical scenario we see is a couple who have achieved their wealth accumulation goals and they have children or loved ones who they would like to help in their next stage of life and need advice about how to do this.

What is the most tax effective way to do this? Is it to make gifts outright during your lifetime, sell assets and give loved ones the cash, or to wait and leave it all in a Will?

There are clearly many factors to consider and every family is different. A starting point is the age of your children or loved ones whom you want to pass the wealth onto, the flexibility you would like over the future use of assets, your age and needs.

Take Tom and Steph. They have looked at their whole financial portfolio and are aware that if they do nothing, they will leave a large Inheritance Tax (IHT) bill for their children. They inherited a residential property a few years ago which has no mortgage and they have been renting it out for a modest return each month. They don’t need the asset or the income it generates, but their children are now aged late teens to early 20’s and would welcome the income (and the asset) whether to pay for university, getting a foot on the property ladder, buying their first car etc.

They could gift the ownership of the property to the children and providing they survive for seven years from the date of the gift it falls out of their estate for IHT purposes. This does however attract Capital Gains Tax (CGT) payable within 60 days, with Steph and Tom being higher rate tax payers this means a CGT rate of 28%.

But as one of their children is aged under 18 and another with some questionable friends, they don’t feel comfortable with them owning the property directly or having access to that much income. They are in their opinion too young for that much financial responsibility, so what are the other options?

Would a trust be suitable? This option has the same IHT savings as gifting the property to the children, but the CGT can be deferred providing all beneficiaries are over 18. They could consider setting up the trust for the adult children initially and then add the others as they reach this age. With the CGT being deferred it does mean a larger tax cost will arise if the trust sells the property in the future. However this is matched with the cash received, the risk here is that the rates of CGT could increase in this time.

Steph and Tom also own some land which is used for grazing. At the moment the land is worth £25k, but it may have development potential in the future which would significantly increase its value. They don’t want to sell the land as they use it for themselves at the moment but adding that to the trust can also help them to make an IHT saving over the next several years. They can continue to use the land as long as they pay ‘market rent’ for it while they use it.

Tom and Steph also own shares in a trading company and trading companies can qualify for 100% Business Property Relief (BPR) if they are wholly or mainly trading. Where a business has built up significant cash reserves or a property portfolio which isn’t being used by the trading business then BPR can be at risk. If they decide to sell the shares in the company, they may be liable for CGT subject to Business Asset Disposal Relief but the BPR will no longer be available.

Tom and Steph could consider making a direct gift of the shares or into a trust while the company is trading and there would be no upfront CGT due to the availability of holdover relief. The value of the gift for IHT is nil due to the 100% BPR being available allowing them to transfer any number of shares they feel appropriate. CGT deferral will only be available assuming all the beneficiaries are over 18 at the time.

The above are only a few of the bigger tax planning opportunities available to Tom and Steph and it is not necessary for them to do them all at once, nor at all. They are however keen to ensure the family makes the most of the assets and income in a tax efficient manner but also ensuring that the children create their own path in life, a hard balance to try and achieve.

If you would like to discuss how to share your wealth with your loved ones, get in touch with our team.

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