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If the total value of your home and other assets is around £325,000 (or £650,000 for married couples), it is very important to realise that even if your requirements are quite modest now, you may find yourself in a situation later where you need to draw on your assets e.g. to pay for additional care, or other unforeseen expenses as you get older.





The priority must therefore be to make sure that you have not only what you need now, but also looking ahead, and as the saying goes: 'do not let the tax tail wag the dog!' In such situations IHT-planning remains important but it should not be your top priority.


Perhaps we should just remind you of the fact that if you are/become in poor health and subsequently need residential or nursing care you could be penalised. If you have given assets away, you could easily be perceived as having deliberately 'deprived yourself of assets' which would count against you should you seek local authority assistance with care funding in the future,


It is generally wise to employ a predictive cash-flow model in these cases to forecast the likely levels of future income,


If you are so lucky to have e.g. an index-linked state pension, a personal pension and/or a decent final salary pension then your future income has a good chance of keeping up with inflation and your changing requirements.


In such circumstances the aim is to maintain the level of wealth close to, or below, the threshold without impacting on lifestyle.


Ways in which this can be done is through the use of various tax-exempt gift options.



1. The annual gift allowance


You are allowed to give away up to £3,000 each tax year (or £6,000 per year for a married couple) to one or more people, without any tax liability.


If you did not use your previous year's allowance you can carry it forward to the current tax year which would enable couples to give away up to £12,000 in their first year of ‘gifting’.



2. The small gifts allowance


Unlimited gifts of up to £250 can be made each tax year although they can not be gifted to the same person who received the annual £3,000 gift.



3. Gifts out of normal expenditure


This exemption is perhaps one of the most important of the ‘gift-exemptions’ as it potentially carries the greatest scope for asset transfer.


This important opportunity is only available to you if you find that you have more income than you need in retirement.


Provided you can prove that it does not affect your normal lifestyle, monthly or annual gifts can be made out of regular income. It's also possible to make exempt gifts to people who are getting married, though these are generally less significant as they are likely to be somewhat infrequent!.


They include up to £5,000 from each parent of the couple; £2,500 from each grandparent or more remote relative; £2,500 from bridegroom to bride (and vice versa) and between civil partners; £1,000 from anyone else.


A different, but straight forward and often effective solution is to establish:



4. Insurance against IHT liabilities


It’s always a hard time when a loved one dies, but if your heirs also are forced to e.g. take out large loans at short notice, just to pay IHT on the inheritance you’ve left them it can cause much extra stress and hardship.


One way to protect your family or loved ones from this after you die, is to take out an ‘Inheritance Tax Insurance’ to make sure that your family get what you left them, be it money or property, without having to pay a hefty fee first in order to even access it.


This can sometimes be deeply ironic if you have left money that could, in different circumstance, actually be used to pay this inheritance tax!


One way of doing this is to get inheritance tax insurance and to put in place either a term or whole-of-life plan written in trust for the beneficiaries, which will pay out on death. The idea is that the sum assured should at least match the potential IHT charge, so that if you die within the cover period (or before assets have been transferred to your beneficiaries in a tax-exempt manner) your beneficiaries won't have to meet the cost themselves.


In general, it's important to understand that whole-of-life insurance policies do not enable you to avoid tax - merely to pay for it in advance, and by instalments. Decreasing term life insurance written in trust can be extremely useful in situations where potentially exempt gifts (PETs) are being considered (see section on PET rules)



5. Transfer of Un-crystallized pensions


Sometimes, couples may find they have an unused (deferred) pension pots they don't need to draw on at all for income. In such cases, it's possible to wrap a pension trust around it so that someone instead of the spouse can inherit the benefits free of IHT on death.


You can normally nominate a beneficiary (generally the spouse) for unused pension benefits, by way of a notification given to the pension fund trustees. However, they have discretion as to whom they accept to pay the benefits to.


The use of a trust ensures that the pension goes to the beneficiaries you intended, and also removes the value of the assets from the joint estate thus keeping the value on second death below the current £650,000 threshold.



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You are always Welcome

to contact NFA for a free discussion

of your Inheritance Tax Questions


Phone: 01603 452686










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