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Yes, thanks Essex, I know things go out of date so quickly, that's a problem for books!
Hopefully people understand that but can still find value, realising they need to double check for updates.
My view of IHT is that it's just one last go at us, after a lifetime of being taxually abused. Really: the money's probably already been through at least ten rounds of having a good taxing by then!
"It is the small decisions you and I make every day which shape our destinies." Anthony Robbins
Just to confirm, I've now had a thankfully short reply from my accountant:
"£325k is the nil rate tax band.
PETs are any amount and if you survive 7 years they are not taxable."
just to put my tuppence in......!!
in very simple terms:
You are able to make gifts of unlimited value (not limited to £325k), as long as it is not to a Trust (or most types of trust to be more accurate), and as long as you survive 7 years.... it will not be dragged back into your Estate upon death, and therefore free of IHT.
This gift is a PET. and when you make the gift, it is POTENTIALLY EXEMPT, as you need to survive 7 years for it to be exempt.
if you die within 7 years, the whole value of the gift gets brought back into your estate, and will be the first part of your estate to use up the Nil Rate Band (NRB). For many, taper relief is not applicable.
a CLT (Chargeable Lifetime Transfer) is where an immediate tax charge to 20% is incurred, and this is generally when you gift more than £325k into a trust either in one gift or over a period. The amount of £325k is chargeable at 20%.
If you gift £325k to trust and survive 7 years, potentially it is out of your Estate and you will have not paid the 20% tax charge (& you can gift a further £325k into trust and another 7 year clock starts).
HOWEVER, be very careful, as when over a period you make some PETS and some CLTs, things start to get really complicated in how they inter-relate and gifts made 14 years before death can be relevant and brought back into your Estate. So you need proper advice.
I hope that has given you a basic idea.
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I only just spotted your post here! Wow, thanks for that. I think that explains the confusion!!
So there is a 'place' where a £325k limit applies, every seven years - and it's in Trusts!
I'm not sure why people would put money into Trusts for their heirs though? (Other than I saw someone on Grand Designs whose family put his inheritance into Trust as he took drugs in his youth, so they wanted trustees to be in control of his spending!)
I actually set up a trust for my children when they were young, that would pay out when they grew up. I did it to 'earmark' the value in some properties for them (effectively one each), so I could give them a lump sum. I thought I was being clever at the time, but later thought it was a bit pointless as I gave them money anyway and the trust just paid more tax at one time and had a separate bank account etc which was a pain! (It's been wound up now as they've all grown up and been paid out).
I don't see a reason to put money into a trust for their inheritance though?Thanks so much for clarifying these points. I see you are a professional in this area.
No worries Angela, my pleasure.
Ref. trusts, there is a time and a place for them. They don't have to be expensive to run, but obviously many professional trustee co.'s, accountants, solicitors like to make a few quid from them! It does not need to be this way.
There are a number of benefits of using trusts, with many nothing to do with tax and more to do with asset protection - the assets staying with or being used by the people you want them to. Ref. tax, they can help with IHT especially if you start gifting early enough and it is part of a planned decumulation of your wealth for the next generation.
- If you gift absolutely to your children, you are passing on an IHT headache to them - generational IHT is a massive earner for the Treasury. If you pass them £2m and survive 7 years, no IHT for your estate, but you hope they are successful in their own right and grow assets more than the NRB & RNRB - so say £1m between a married couple. You've passed them £2m IHT free, but when they die if they haven't gifted early enough, that £2m is under attack at 40% IHT. By putting the assets in trust over a period, then your children have use of the assets / money, but it is not in their estate.
- If you gift absolutely to your children, and they marry and subsequently divorce then half of what you gifted could potentially be up for grabs by the departing in-law. By putting the money in trust, it is not your children's actual assets and hence protected from divorce settlement.
- Marriage after death - more relevant for Trusts that are settled by a Will when you die. Basically, if the surviving spouse remarries, if you have put your estate in trusts upon death the assets can be accessed by who you've made beneficiaries. Rather than if the survivor remarries and all of a sudden your children get dis-inherited - I have seen this often.
- If you gift to your children absolutely, and they have bankruptcy or creditor issues - all assets incl. those gifted by you at risk. Not when they were gifted to trust.
Anyway, that gives you a flavour why trusts can be beneficial and why generally they are used these days. As post Gordon Brown's changes to the taxation of trusts in 2006, they are less tax efficient - albeit as I say they can help in certain instances.
****Please do not construe this as advice. It is purely giving you an idea of what can be done and is not specific to your circumstances****
Thanks Jon, Now trusts sound interesting!
I'm looking into this for a book I'm writing, but as I've always said I'm writing it for myself as well as others; and this subject really gets to the heart of what I most care about, passing on money to my children.
I'm interested in trusts now! I'm assuming I could put properties into this type of trust, rather than having to 'park cash'?
I may give you a ring next week (maybe not Monday though) or else I may email firstly.
No worries Angela
My basic understanding is that a pet can be for any amount and provided you survive for 7 years since making the gift it does not form part of your estate for IHT purposes.
The trouble with gifting property is the CGT that will arise unless its a transfer to a spouse.To get around this you could mortgage the hell out of the property and give the cash away.That way there is no CGT and provided you survive for 7 years the cash becomes tax free.This strategy worked well before S.24
As you say, thrashing the profits out of property through drawdowns or remortgage used to seem like a good idea before S24 - or arguably before the financial crisis of 2008.
Thanks for the reminder that CGT will arise on putting properties into Trust though - I didn't think of that. (When we set up the one when our kids were little, it was with properties we'd only recently bought, no capital gains).
Also, I think I was forgetting when talking to Jon Rose, that someone said earlier the rule changes mean "you now only get one go of the £325k NRB." I was still thinking it could be every 7 years. So the use of trusts is now limited to £325k (per person) I gather?
If you really want to shrink your estate why not give away your principal private residence as there will be no CGT and then move into one of your rental properties.This might sound a bit extreme but it will save alot of money.Then you still have your nil rates bands and you could do other PETS.I don't really understand the new rules about the first million being tax free for PPR so need to look at that.
There are other ways to give away your PPR and still live in it but you will have to pay the market rent to the beneficiary.They will then have to include the rent on their tax return.
Other things to look at are Family Investment Companies,LLP's and Hybrid Structures.Hybrid structures can take many forms but they seem to set up a LLP and LTD co together.That way you only pay tax at 20% and no IHT.Some people set them up when they are basic rate tax payers because of the IHT advantages.
Mark Alexander has already warned against Hybrid structures because they are not guaranteed ie HMRC may come after you 5 years down the line and hit you with a massive tax bill so they seem a bit frightening to me and I would not be able to sleep at night.I am going to speak to an IFA in the week to see if I can improve my understanding of them.The other thing I like about hybrid structures is that the properties remain in your personal name so no need to refinance.
The most frustrating thing about getting tax advice is that the tax accountants don't seem to agree with each other as to the best way forward especially where S.24 is concerned.The thing I particularly dislike about the limited company route is that if you sell, you pay CGT twice ie once at the corporation tax rate and again when the money is extracted from the company.