ESTATE PLANNING
Gifting
At Roxburgh Financial Services, we specialise in providing comprehensive succession planning advice, ensuring that our clients can pass on their assets to the next generation in the most tax-efficient manner possible. Understanding and navigating the intricacies of this planning is paramount for anyone looking to safeguard their family’s financial future. One critical area within this domain is the management of lifetime transfers and the pivotal seven-year rule.
Understanding Lifetime Transfers
Lifetime transfers are gifts made during one’s lifetime and are significant in estate planning and inheritance tax optimisation. These transfers are categorised into two main types: Potentially Exempt Transfers (PETs) and Chargeable Lifetime Transfers (CLTs). Classifying a gift into either category has profound implications for Inheritance Tax liability and planning.
POTENTIALLY EXEMPT TRANSFERS (PETs)
Potentially Exempt Transfers (PETs): PETs are straightforward yet powerful tools in estate planning. When you give a gift to your children or any other family member, this gift can be exempt from Inheritance Tax, provided you live for more than seven years after making the gift. This exemption allows for significant tax savings and is essential in strategic estate planning. However, it’s important to note that while the gift itself may not be subject to Inheritance Tax if the seven-year condition is met, any income or gains generated from the gifted asset could still have tax implications for the beneficiary, such as Capital Gains Tax.
CHARGEABLE LIFETIME TRANSFERS (CLTs)
Chargeable Lifetime Transfers (CLTs): In contrast, if you do not survive for more than seven years after making a gift, that gift is classified as a CLT. This classification means the gift could be subject to Inheritance Tax, affecting the overall tax efficiency of your estate planning. It emphasises the necessity of careful planning and timing when making significant gifts.
Significance of record-keeping
A crucial aspect of effective succession planning and managing lifetime transfers is meticulous record-keeping. Documenting details such as the nature of the gift, its recipient, the date of the gift, and its value is indispensable. This documentation aids the executor of your estate in accurately determining tax liabilities during the probate process, ensuring a smoother transition and compliance with tax obligations.
Strategies for maximising Inheritance Tax exemptions
At Roxburgh Financial Services, we work closely with our clients to develop personalised strategies that maximise Inheritance Tax exemptions and minimise liabilities. By leveraging our expertise in the seven-year rule and the nuances of PETs and CLTs, we help our clients achieve optimal tax efficiency in their estate planning. Our bespoke advice ensures you can make informed decisions about when and how to gift assets, ultimately securing your family’s financial well-being.
Utilising Tax Exemptions in Estate Planning
There are many ways to effectively use tax exemptions, from wedding gifts and life insurance premiums to familial gifts and charitable donations. These strategic avenues can significantly reduce potential tax burdens. Our role involves helping you understand how to use these exemptions to benefit your estate, especially when dealing with non-exempt transfers.
Significance of the seven-year rule
The seven-year rule plays a pivotal role in determining the tax status of both PETs and CLTs. PETs’ exemption from Inheritance Tax hinges on the donor’s seven-year survival following the gift. An immediate tax liability may apply for CLTs exceeding the nil rate band at the transfer time, though surviving seven years post-gift can mitigate further taxes.
Navigating Lifetime Transfer implications
When CLTs exceed the nil rate band threshold at the time of the gift, they trigger an immediate Inheritance Tax charge. If the donor fails to survive the seven years, these transfers must be included in the estate valuation for tax purposes. We help our clients consider the potential outcomes and tax implications of such transfers, including the application of taper relief on failed PETs.
Assessing and managing risks
Choosing PETs as a tax mitigation strategy requires careful assessment of the risks associated with not surviving the seven years against the potential tax benefits. Failure to meet this criterion results in the inclusion of the total value of the PETs within the estate for tax purposes, subject to possible taper relief adjustments.
Role of taper relief in reducing tax bills
The calculation of Inheritance Tax on gifts exceeding the nil rate band is dynamic, adjusting according to a sliding scale based on the time elapsed from the gift’s date to the donor’s death. No taper relief is applicable if the donor passes away within three years of the transfer. However, for durations between three and seven years, taper relief is available at specified rates, offering a method to reduce the tax liability for the gift recipient.
Taper relief
The rate of Inheritance Tax gradually reduces over the seven-year period – this is called ‘taper relief’. It works like this:
*How long ago was the gift made?
**How much is the tax reduced?
| *0-3 years | **No reduction |
| 3-4 years | 20% |
| 4-5 years | 40% |
| 5-6 years | 60% |
| 6-7 years | 80% |
| More than 7 years | No tax to pay |
It’s important to remember that taper relief only applies to the amount of tax the recipient pays on the value of the gift above the nil rate band. The rest of your estate will be charged the full rate of Inheritance Tax—usually 40%.
Charitable giving
A significant part of the succession planning strategy involves advising on the benefits of charitable giving. Not only does this act of generosity support causes close to your heart, but it also offers tangible tax benefits. If appropriate, you could reduce the Inheritance Tax burden on your estate by including charitable donations in your Will or as part of your lifetime giving.
Cash or physical assets left to a qualifying charitable organisation during your lifetime or through your Will are exempt from Inheritance Tax. This generosity can also lower the Inheritance Tax rate from 40% to 36%, provided the gift amounts to at least 10% of the net estate value at the time of death. Given the potentially high value of estates, this strategic giving could save thousands of pounds.
Maximising your Gift Allowance
Beyond charitable giving, effective succession planning also involves fully using your annual ‘gift allowance’. Currently set at £3,000 per tax year, this exemption allows you to give away assets or cash without adding to the value of your estate for Inheritance Tax purposes. Unused portions of this allowance can be carried forward one year, providing a strategic opportunity to reduce your estate’s taxable value further.
Furthermore, gifts below £250, wedding gifts within certain limits, and gifts towards an ex-spouse, dependent, or child’s living costs or education can also be excluded from Inheritance Tax calculations, offering additional pathways to tax-efficient estate planning.
Expertise in tailoring your plan
At Roxburgh Financial Services, our expertise lies in crafting tailored succession planning solutions that align with your personal values and financial goals. We understand that each client’s situation is unique, and we dedicate ourselves to navigating the complexities of tax laws to secure your legacy while maximising the benefits of your generosity.
Whether utilising your annual gift allowance, strategising charitable donations, or exploring other tax-exempt gifting options, our team is committed to ensuring your wealth efficiently serves your loved ones and your philanthropic interests. At Roxburgh Financial Services, we are here to guide you every step of the way.
Ready to make a lasting impact with your succession plans?
For personalised advice, contact Roxburgh Financial Services today. Our highly experienced team is ready to help you make a lasting impact.