Ian Macdonald

Published by
Ian Macdonald

25th September 2018

Would you like to help your family financially or would you like to save tax? No matter which is your priority, you can achieve both with careful planning and expert advice. In fact everyone should start with the "What do I want to do?" question rather than the "How do I save tax?" one but once you have sorted out your objectives - in discussion with your family - good financial and legal advisers will be able to help you achieve them in the most tax-efficient way.

How much will I need?
You have worked hard to secure what you have so any plans to pass your wealth to the next generation involve a number of conflicting objectives - control, timing, access, your standard of living and future needs, protection and tax-efficiency. The first step must always be to assess how much you may need to meet your own commitments including possible care costs in the future - but be realistic about this and seek out advisers who can help calculate how much you might actually need if long term care is required.

Discuss your plans
Talk to your family about your plans - they may have particular needs that you don't know about or may have suggestions about how and when you might best pass on assets - you may be surprised how sympathetic they are to your needs and ideas.

Protect the assets
Most estate planning involves giving money or assets to your chosen beneficiaries but you need to think about how much to give, to whom, when - and how. A direct gift may not always be the best strategy, particularly if there is a risk that your beneficiaries might encounter financial, matrimonial or health issues. In all of these situations giving the assets to a trust for the selected beneficiary can help.

"How much can I give away?"
I am probably asked this question more than any other when discussing estate planning with clients. Everyone knows that what they give away may still be liable to inheritance tax (IHT) and there are exemptions and allowances which can be used to reduce the tax but IHT is complicated and the allowances can be confusing. The simple answer is nothing to do with tax because you can give away as much as you like as long as you are satisfied that what you retain will be sufficient for your future needs. If your gifts are not covered by exemptions you will have to survive for 7 years before they drop out of your estate for IHT.

The IHT annual allowance for gifts is only £3,000 but potentially much more useful is the exemption for "normal expenditure out of income". If you have surplus income once you have paid income tax and all your living costs, you can give away the excess year after year with no IHT to pay and no need to worry about surviving 7 years

When someone dies, anything left to their spouse or civil partner will be tax free although obviously the combined estates will be subject to IHT on the second death. Each person has an amount which is exempt from IHT called the nil rate band (NRB) and that is currently £325,000. Since April 2017 an additional Residence NRB has been available for those who leave a house to their children - this is currently £125,000 and will increase to £175,000 by April 2020.

Both NRBs can be transferred from one spouse to another so couples could have a total tax free allowance on death of £1m - provided you have children and a suitable house and leave one to the other. Assets above this are taxed at 40%. The rules for the Residence NRB are very complex and you should take advice if it is important to your estate planning.

Can my pension help?
If you have your own personal pension plan such as a SIPP the answer is bound to be "yes". Pensions do not form part of a person's estate which is subject to IHT and a pension can be structured and passed on as a tax free fund but again the rules are complicated (HMRC don't make it easy to save tax!) and again good advice is essential.

What should I do?
Assemble details of everything you have, assess your needs, discuss your plans with your family and your advisers, be realistic about when it may be necessary to put trusts or other structures in place to protect the assets and beneficiaries - then put the plan into operation and keep a detailed record of what you have done. Watch out that you don't end up paying one tax to avoid another and make sure that any gifts you make are complete ones - if you retain any benefit in the assets you have given away the arrangement may not achieve the tax saving you hoped for.


The information contained in this newsletter is for general guidance only and represents our understanding of relevant law and practice as at September 2018. Wright, Johnston & Mackenzie LLP cannot be held responsible for any action taken or not taken in reliance upon the contents. Specific advice should be taken on any individual matter. Transmissions to or from our email system and calls to or from our offices may be monitored and/or recorded for regulatory purposes. Authorised and regulated by the Financial Conduct Authority. Registered office: 302 St Vincent Street, Glasgow, G2 5RZ. A limited liability partnership registered in Scotland, number SO 300336.