Trusts, Inheritance and General Tax Planning

Why is this area important?

The use of trusts in financial planning is becoming ever more popular.  By using trusts, a client can ensure that their estate is left to those whom they personally wish to benefit from it, whilst at the same time ensuring they have mitigated their exposure to Inheritance Tax.  Our advisers have many years of experience in helping clients to arrange their financial affairs in such a way that they can be totally confident and have peace of mind knowing that these objectives have been achieved.

What Trust solutions are there?

Very basically there are three types of Trust.

Discounted Gift Trust

This type of Trust allows the client to make an immediate Inheritance Tax saving with further savings to be made after seven years, as the gift to the trust is a Potentially Exempt Transfer (PET).  It is important to note that the client must take an income from the trust.

The amount which becomes immediately free of Inheritance Tax depends on the client’s age, gender and the amount of income taken.  The greater the income taken the greater the sum immediately free of Inheritance Tax (the “discount”).  The amount used to calculate the potential tax liability of the Trust is the original gift placed into the Trust less the “discount”.

Gift and Loan Trust

This type of Trust allows clients to cap any further Inheritance Tax liability on the capital they “loan”.  Clients loan the capital to the trustee and can then take withdrawals to supplement their income, whilst any growth that is achieved on the loan amount is outside of their estate for Inheritance Tax purposes.  Clients can request repayment of the loan either on a regular basis or in ad-hoc amounts or a combination of both.  It is important to note that the client only has access to the loan amount, not to any growth.

Flexible Gift Trust

This type of Trust is designed for clients who want to give away a sum of money which is surplus to their requirements (i.e. to which they no longer require access or have need of).  The donor cannot benefit from the money gifted to this Trust although they can retain control over who will ultimately benefit.

The ability to place Insurance in Trust

Insurance policies can be placed into Trust which is useful when personal circumstances do not allow capital to be placed in Trust; however, there is a liability to Inheritance Tax.  An insurance policy can be written to provide enough capital on the death(s) of the client(s) to cover any potential Inheritance Tax liability.  By writing the insurance plan in Trust means it does not form part of the estate for Inheritance Tax calculations, but any proceeds pass directly to the beneficiaries to enable them to pay the liability.  These insurance trusts are often run in conjunction with other trusts that provide the “income” to fund them.

Inheritance Tax

Inheritance Tax, (sometimes referred to colloquially as ‘death duty’) is a tax that is levied on a person’s estate upon their death.

There are various planning methods you can use to mitigate this tax liability, such as the use of Trusts.  In addition to this, the government will allow certain gifts to be made, which can also help to mitigate your liability.

Inheritance Tax planning can be very complex, however, many individuals have paid heavy financial penalties for not confronting this issue as part of their overall financial planning requirements and taking action to protect their beneficiary’s inheritance in a timely manner.

At Capel Court we are able to advise you of the issues and if required can direct you to appropriate specialists who can help you.  We are also always happy to work with your existing professional advisers to achieve the optimal solution for your personal circumstances.

General Tax Planning

Why is this area important?

Many of us have heard about individuals who are paying more tax than is necessary.  With careful planning and advice, we can help ensure that your investments are arranged and managed in a tax efficient manner.

What solutions are there?

In addition to Inheritance Tax which we have previously covered, there are basically 3 other main taxes applicable to an individual.

  •  Income Tax
  •  Capital Gains Tax
  • Dividend Tax

It is important to note that depending on your circumstances other taxes may also be applicable to your personal situation and circumstances.  As such, the information contained below is not exhaustive, but merely a generic guide to these common forms of taxation.

Income Tax

Income tax is quite simply a tax on ‘income’.  It is payable, at different rates, on ‘earnings’, including investment earnings, savings interest and pensions, above certain thresholds and with certain allowances and reliefs, which are generally set annually by the Government.

There is no minimum age at which a person becomes liable to pay income tax.  However, not all types of income are taxable and there are investments and savings, such as offshore deposit accounts, or some National Savings products, where the interest or earnings income is paid gross.  The proceeds received from NISAs are also not subject to income tax.

It should be noted that only personal pension contributions made currently get tax relief.  Such contributions are made net of basic rate tax and the pension provider then grosses up that contribution.

It is important when allocating savings and investments to do so efficiently according to your personal situation and goals, and that is where we can help.

Capital Gains Tax (CGT)

As a general rule, you will have to pay CGT if you dispose of an asset for more than you paid for it (on the basis it is done outside of a business activity).  That said, it is not quite that simple.  Profits on the sale of a business, or shares in a company (quoted or unquoted), or investment gains generally, whether securities, land, buildings, antiques or jewellery, are all taxable.  The most common exemptions to this are private cars and your home, as long as it is your principal place of residence.

Other exemptions to the rule are any Capital Gains that are made from NISAs, pensions, Premium Bonds, betting, lotteries or personal injury compensation claims.

You also have an individual personal allowance set annually by the Chancellor of the Exchequer on which you do not have to pay any CGT.  The government has altered the rules slightly in that any gain over and above the annual allowance is added to your taxable income for that tax year.

Dividend Tax

The way that dividends are treated is changing.  Historically there was a notional 10% tax credit applied to any dividend received for the purpose of calculating Income Tax.

From April 2016 the way dividends are taxed changes.  Everyone will receive a nil rate tax allowance above which tax will be tiered according to the individual's income tax banding, whether basic rate, higher rate or additional rate tax.  This will mean that if an individual receives dividend payments in excess of the nil rate tax threshold they will need to complete a self-assessment tax return and the appropriate level of tax will be applied.

These rules do not currently apply to dividends received when held in either a NISA or pension arrangement.

It is important to note that General Tax Planning is NOT regulated by the Financial Conduct Authority

For more information on any aspects of Trusts, Inheritance Tax Planning or General Tax Planning please contact us