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Inheritance Taxation Planning

Reduce the liability Inheritance Tax Planning
In theory, IHT is a voluntary tax as any gifts made at least seven years before death escape the tax completely. In reality, this is far from simple. Not only must you be sure that you can afford to give the assets away for ever (and you may live considerably longer than seven years) but the gift must be absolute. For example, giving away your home but retaining the right to live in it does not save as it is a "gift with reservation".

It is possible to make a gift into trust rather than an outright gift. The advantage about making a gift into trust is that the donor can ensure that only those who should benefit from the gift actually do benefit.

Married couples are in a unique position as any transfers between spouse are exempt. In a typical example, a husband and wife will leave their estates to each other. On first death, the whole estate passes to the surviving spouse and there is no IHT to pay. On second death, any excess over the nil rate band will be taxed at 40%. By transferring all the assets to the surviving spouse on first death, this typical couple have "wasted" one of the available nil rate bands.

There are three ways round this "waste". In the will of the partner who dies first, an amount equal to the nil rate band could be left directly to someone other than the spouse. It is possible to achieve the same tax saving by passing the nil rate band to a will trust from which the surviving spouse may benefit. The third alternative is to use a lifetime trust in which the surviving spouse is named as a discretionary beneficiary. see making a will


Stop the liability growing
The liability to the IHT does not remain static and this is one of the greatest difficulties created by the increased life expectancy. Many assets, such as property and shares, tend to grow faster than inflation. So should your house increase in value by more than the rate of inflation your IHT bill will carry on increasing throughout your life.

One of the most effective ways of dealing with this aspect of IHT is often overlooked. This is the technique of placing assets outside your estate by way of loan.

This allows you to "have your cake and eat it" to a certain extent, The concept is that the loan remains yours but all capital growth on the asset, from day one, takes place outside of the estate for IHT purposes. For example, one could place £50,000 into a loan scheme and that capital would always remain yours, repayable to you on demand either as a lump sum or in smaller amounts to provide an "income". Although the original capital remains yours under your control, all capital growth would remain IHT free effectively freezing your liability.

"Loan Trust" plans are available from a number of leading investment groups that provide all of the documentation for these schemes at no extra charge.


Make provision for the liability
Some people are not in a position to give money away or to lend it. It is possible to open a regular premium policy which will provide a lump sum on your death. This can be used to pay any IHT. It can be a very efficient way of covering any potential liability for IHT as the premiums could well be within the annual or normal expenditure exempt limits and so long as the policy is written in trust, the policy proceeds will be outside of your estate. There is the additional advantage of the funds being readily available shortly after death, rather than waiting for probate.

A new range of "whole life" plans have become available with significantly lower premiums. These can be extremely cost effective particularly for those in their 50's or 60's.

What's new? Phased Retirement for anyone (2016)

Phased retirement was introduced to add flexibility to drawing benefits from a personal pension. Basically, it divides your pension fund into one thousand little policies allowing you to draw the combination of tax-free cash and annuity income from each one separately. The concept is to encash (vest) the exact number of plans each year to meet a target income.

As most of the cash released comes from the tax-free cash element of the policy initially there is very little tax liability in the early years. Over the years the annuity element will rise and eventually this will provide the majority of the income.

The main advantages of the system is that it allows you to adjust your income levels at will in the early years and to leave most of the fund invested whilst drawing an income. Annuity purchase is thus delayed and spread over a number of years rather than taking place all at once. The concept is very flexible but the main disadvantage is that most of the tax-free cash is used to provide income and cannot be drawn as a lump sum.

These days phased plans are often combined with income drawdown to give the greatest possible flexibility but the administration of these plans can be complex. At age 75 any remaining funds that have not been vested must then buy their annuity (or tax-free cash.). Phased Retirement -

Frugal & Economic Lifestyle

Pensions & retirement in Great Britain

Retirement Income Options

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