Tax Planning

Grandad, Dad, and child playing on the sofa

Using trusts for Inheritance Tax planning

By | Tax Planning

If you are thinking about estate planning and passing assets to different generations, establishing a trust is one way of ensuring your wishes are carried out in a tax-efficient manner.

According to the latest figures published by HMRC, Inheritance Tax was one of the few revenue-generating taxes that increased in the 2020-2021 tax year. Inheritance Tax receipts increased to more than £5.3 billion in 2020/2021 compared to the previous year (although below their 2018/2019 peak of £5.4 billion). According to HMRC, this increase is likely in part due to the higher number of wealth transfers that took place during this tax year, and the higher than the usual number of deaths, in part due to COVID-19.

Given the higher tax take and increasing asset values, Inheritance Tax planning is becoming relevant to more and more families. When it comes to Inheritance Tax planning, there are a number of options, which are all worthy of consideration in most circumstances. Each has positives and drawbacks, which is the primary reason why taking independent advice tailored to an individual’s precise situations, needs and objectives, is particularly important in this area. Establishing a trust during an individual’s lifetime is one option that is often a suitable solution.


The history of trusts

Trusts are one of the older forms of English financial and property law, having started life in medieval England, around the 12th century. Historians will tell you that when knights went off to war, a trust was required to implement the stated will of the knight, while at the same time granting power to the person chosen to manage the knight’s estate in his absence.


Common uses for trusts today

Today, trusts are used either to pass assets during an individual’s lifetime or to help determine what happens to someone’s property or assets in the event of their death. Trust arrangements can be particularly useful where large sums of money are involved, or where the family relationships are complicated, for example after divorce or remarriage, or where children and stepchildren are involved. And above all, trusts place controls over who can receive the assets or property, and when they become eligible to receive them.

Lifetime Trusts are useful when individuals wish to ringfence funds for future generations or to make a gift to family members who maybe cannot receive funds due to their age (i.e. if they are under the age of 18). A common use of a trust is to set aside funds to cover university costs or provide a house deposit for younger relatives.

An important concept to consider is that placing assets into a trust, with the intention of being effective for Inheritance Tax purposes, will mean that those funds will be out of reach to the person making the gift, who is known in law as the “settlor”. This means that trusts tend to be inflexible and careful planning is needed to ensure that funds gifted into a trust will not be needed by the settlor in the future. In addition, the monies placed into a trust will not fully leave the settlor’s potential estate for seven years after the date the gift has been made.

When gifts into a trust are made during an individual’s lifetime, there are different types of trust arrangements that can be used. A Bare Trust is a simple form of trust that is often used for beneficiaries (i.e. the person or people nominated to receive funds from the trust) who are under the age of 18. There is no need for decisions to be reached as to who receives funds from the trust, as the beneficiary is established at the outset and once the beneficiary reaches 18, they are automatically entitled to the funds under law.

Discretionary Trusts are more flexible, in that the trust wording establishes a “pool” of potential beneficiaries. This is often all members of the settlor’s immediate family, including grandchildren and great-grandchildren, but excluding the settlor and spouse. This type of arrangement doesn’t specify who receives the trust fund and allows the ultimate destination of the funds to be decided at a later date. This flexibility comes at a price, however, as this type of arrangement is potentially subject to Inheritance Tax charges every 10 years.


Trustees’ duties

In both cases, trustees are appointed to administer the trust. This is often the settlor but other family members, trusted friends or professionals, such as solicitors, can also be appointed. Ideally, there will be at least two trustees, with a maximum of four being appointed. Trustees must ensure the trust is administered correctly, decide how the trust fund is invested, ensure the correct amount of tax is paid and submissions to HMRC are completed, and in the case of a Discretionary Trust, make decisions as to when sums of money are paid to beneficiaries and how much is paid.

The Trustee Act 2000 sets out comprehensive guidance as to how trustees need to act, when they need to take advice from professionals, and how they reach their decisions. Being a trustee is an important role that carries significant responsibility, and therefore careful thought is needed as to who is appointed as trustee when a trust is set up.


Trusts have their limitations

While setting up a trust gives you much greater control in determining where your assets will eventually go, they do have some limitations. For instance, they can often carry a higher burden of tax and greater levels of administration.

In the right circumstances, however, Lifetime Trusts can be an efficient way to plan ahead, by ensuring funds are set aside for future generations and potentially reducing the Inheritance Tax burden on an individual’s estate.

But setting up a trust can be complicated, so it’s always worth talking to an experienced professional who can talk you through the process in determining which type of trust is right for you and your family.


If you are interested in discussing estate planning arrangements with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Man calculating finances with laptop and paperwork

Reducing the capital gains tax liability in an investment portfolio

By | Tax Planning

You don’t know what you’ve got till it’s gone, and investors would be wise to make use of their annual capital gains tax allowances while they’re still available.

Making a good return on investments is one of the reasons why people come to us for help with their finances. But while choosing the right investments is an essential part of the process, it is just as important to make use of any tax allowances that are available. One particular allowance worth taking advantage of is the capital gains tax annual allowance.


What is capital gains tax?

Capital gains tax (CGT) is the tax that can be charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an asset. CGT doesn’t apply in all cases, such as selling your home or any personal belongings worth less than £6,000, which are not subject to CGT. However, ‘chargeable assets’ – which includes shares, investment funds, and second properties – that generate a capital gain when they are sold will generally be liable for CGT.


What’s the CGT annual allowance?

When selling investments, basic rate taxpayers will be required to pay CGT at a rate of 10% on gains made on chargeable assets, and higher and additional rate taxpayers can expect to pay 20%. But the good news is that everyone has their own personal CGT allowance available every tax year (6 April to 5 April), which can be used to reduce or eliminate a CGT liability. For the current tax year, the CGT annual allowance is £12,300. This means you can make a profit or capital gain on chargeable assets up to that amount before any CGT is due, and you will then pay CGT at your tax rate on the remaining gain over that amount. Of course, if you have made several gains over the course of the tax year, the CGT liability will be calculated based on the total gain made in the year, with any losses crystallised offsetting the gains made.


How can people end up with a surprise CGT bill?

Although current CGT rates are historically low (CGT was as high as 40% in recent years) and most individuals will never pay it, it does catch investors out from time to time. In our role as financial advisers, we are often asked by new clients to review their existing investment portfolio arrangements.

Where investments have been held for many years, we often discover portfolios laden with investments that carry significant capital gains, that have accrued over a long period of time. Often investors haven’t made use of the CGT annual allowance in past years, and with CGT, it is a case of using the allowance each year or losing it, as unused allowances cannot be carried forward to be used in future years.

So, one of the first things we do is to make sure that the client’s investments are being managed wisely, and with due consideration to the tax implications that come with it. Careful management at key times in the tax year mean we can limit the gains payable on an investment portfolio, ensuring that gains are realised each year to use up the CGT allowance. In most cases, carrying out this practice of limiting the gains payable on an investment portfolio can have a significant positive long-term impact on the total return on the investment.

Will CGT rules be changing soon?

Towards the end of last year, Chancellor Rishi Sunak commissioned the Office of Tax Simplification to look at simplifying the CGT rules, and also asked it to consider specific areas where the existing rules distort people’s behaviour. In response, the Office of Tax Simplification published a report that recommended the annual CGT exemption should be reduced from the current level of £12,300 to between £2,000 and £4,000. Their report also suggested realigning CGT rates to income tax, which would take them from 10% and 20% on investments (for basic and higher rate taxpayers) to 20% and 40% respectively.

Should these proposals be adopted, this would mean lots of people would suddenly face considerable CGT bills. For example, under the new proposals, a higher rate taxpayer who made a capital gain of £12,300 (which is currently exempt from CGT) would find themselves stuck with a CGT bill of somewhere between £3,320 and £4,120. That’s clearly a significant tax hike for anyone to pay.

At present, there’s no indication that the recommendations published by the Office of Tax Simplification will be implemented. But given the unprecedented levels of government support offered during the pandemic, there is a good chance that changes to CGT will arrive in some form. For now though, it’s a good idea to take a look at your investment portfolio and make sure that your annual CGT exemption is being used to the fullest extent.


If you are interested in having a conversation about your investment portfolio with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice. 

Person calculating private school fees with calculator

Tax-efficient school fees planning

By | Tax Planning

A private school education is often considered as an investment in a child’s (or grandchild’s) future. With the right planning in place, and by taking advantage of available tax incentives, it is an investment that could well be within your reach.

Parents – and grandparents – always want the best for their children or grandchildren, and for many this means choosing to give them a private school education. The evidence suggests that students from private schools here in the UK outperform national and global academic averages, and that most children who attend private school go on to get a university education.

However, attending a private school is a privilege that doesn’t come cheap, which can often put parents under increased financial pressure. A Lloyds Banking study from a few years ago found that four out of ten private school parents had struggled to meet school fee payment deadlines and six out of ten parents were worried they might not be able to afford fees in the future.

How much does it cost to send a child to a private school?

According to the 2021 Annual Report published by the Independent Schools Council (ISC), the average fee for a child to attend a private day school is currently £15,191 per annum, which works out at £5,064 per school term. Naturally, day school fees vary depending on where the school is located, average term fees are more than £6,000 in London and £3,700 in the Northwest of England. As you would expect, it costs considerably more to pay for a child to attend boarding school, where the ISC estimates the average cost per term stands at £12,000.

Are private school fees going up?

Afraid so. According to the ISC, UK school fees have increased at an annualised rate of 3.9% since 2010, which is well above inflation. However, while COVID-19 has had a considerable impact on every school, and private schools are no exception, the latest ISC report suggests private schools have only increased their fees by an average of 1.1% in the past year – with average day school fees rising by just 0.9%.

But the school fees themselves are really just the beginning when it comes to counting the costs of a child’s education. You will also need to think about the costs of school uniforms, trips, sports activities (and equipment), and music lessons. When all those costs are factored in, parents might be looking at total costs of between £150,000 and £200,000 per child who attends a private day school, and maybe double that for a boarding school.

Investing to pay for school fees – the mathematical journey

Of course, when it comes to paying for school fees, the sooner you put a plan together – and start setting money aside – the better. If you plan ahead, you can give yourself five to ten years, or perhaps even longer, to build up a savings pot that could help to fund school fees when they become due.

One of the most important aspects of creating a plan to pay for school fees is to calculate the costs of private education, including some of those ‘miscellaneous’ costs that it’s easy to forget to include, and the education time horizon (the number of years the child will be attending the school). Once this is known it becomes considerably easier to create a strategy that will take advantage of the power of compounding, and generate enough investment growth from start to finish.

Tax-efficient school fee savings strategies

Given that interest rates on cash savings accounts remain so low, investing within a tax-efficient savings vehicle is likely to be the best starting point when it comes to saving for school fees – especially bearing in mind you will have to withdraw a large sum from the investment pot every year once the school terms start.

With a Stocks & Shares ISA, individuals can invest up to £20,000 each year, or £40,000 per couple. This would be a good way of constructing a diversified portfolio that contains a broad range of assets and is designed to achieve growth over the targeted investment horizon.

Tax-efficient strategies for grandparents

We are also seeing more grandparents talking to us about investing for school fees for their grandchildren, out of their excess after-tax retirement income. This is a good way to give children a great education while also making sure the parents don’t have the financial burden.

Setting up a discretionary trust can be a tax-efficient way for grandparents to pay the cost of private education. Once the trust has been set up, the grandparents can make a series of regular ‘gifts’ into the trust, and this money is invested according to the arrangements specified by the grandparents.

A valuable benefit of setting up a discretionary trust to pay for grandchildren’s school fees is that the gifts made into the trust should be declared outside of the estate for inheritance tax purposes, provided the donor lives for a further seven years after a gift. Also, annual gifts of up to £3,000 per grandparent are deemed instantly exempt from inheritance tax, as long as this annual exemption has not already been used.

Talk to us about school fees planning 

If you are a parent or grandparent who wants to send their children or grandchildren to a private school, the best way to pay for it is to start the financial planning process as early as you can. When you’re ready, we can help you by giving you a realistic assessment of the costs involved, and to put together a tailored plan to help you reach your savings goals.

If you are interested in discussing school fee arrangements with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only and does not constitute investment or financial advice. Tax rules are subject to change, and tax benefits depend on your personal tax position. 

Multi-generational family walking through woods

Using life assurance to eliminate inheritance tax on gifts

By | Tax Planning

If you are thinking about gifting a large sum of money to loved ones during your lifetime, it is important to realise that the gifts you make could still carry an inheritance tax liability after your death. So, you might want to consider arranging a life assurance policy that will eliminate the risk of leaving behind an unexpected inheritance tax bill.

When Chancellor of the Exchequer Rishi Sunak announced in his March Budget that inheritance tax thresholds would be frozen until 2026, one of the consequences was that inheritance tax and estate planning returned to the top of the agenda for lots of people. We have seen an increase in the number of clients talking to us about the potential inheritance tax liability that could be due on the value of their estate, and we have been pleased to be able to discuss the different estate planning strategies with them – as there are lots of different options available during a person’s lifetime.


What are the current inheritance tax thresholds?

As a reminder, everyone in the UK aged 18 or over has a personal inheritance tax allowance known as the nil-rate band. This nil-rate band currently stands at £325,000. If the value of a person’s estate (money, property and possessions) when they die is below this amount, then there is no inheritance tax to pay. However, if their estate is valued above £325,000, the beneficiaries of the estate will be required to pay inheritance tax at a rate of 40% on the amount over the threshold.

It is also worth noting that if you give your home away to your children or grandchildren in your Will, your estate can also claim the residence nil-rate band, which is another inheritance tax allowance that can increase the value of your estate excluded from inheritance tax to £500,000. However, this allowance is only available provided you leave the home to your direct descendants, and the allowance is reduced if the total value of the estate is more than £2 million.


What are the current rules on gifting?

Gifting money to your family during your lifetime is one of the most popular ways of attempting to reduce an inheritance tax liability. However, in order for a gift to become completely free of an inheritance tax liability, the person who gave the gift must survive for at least seven years from the date when the gift was made. Lifetime gifts of this type are known as potentially exempt transfers. Also known as the ‘seven-year rule’, the inheritance tax bill due on a potentially exempt transfer reduces on a sliding scale for each full year the person who made the gift survives (also commonly referred to as ‘taper relief’); however, no taper relief is available in the first three years after making a gift.

How does this work in practice? Let’s use an example. Frederick gives £200,000 to his daughter. It is a potential exempt transfer, so should Frederick die within the three years of having made the gift, Frederick’s daughter would be required to pay inheritance tax at 40% on the value of the gift (£80,000). In year four, the inheritance tax rate drops to 32% (a bill of £64,000), it falls to 24% in year five (a bill of £48,000), 16% (£32,000) in year six, and 8% (£16,000) in the seventh year. After the full seven years have passed, Frederick’s daughter will have no inheritance tax bill to pay, but as those amounts demonstrate, the inheritance tax due on the gift can prove very costly depending on Frederick’s health during those seven years.

Fortunately, there is a way to remove the risk involved with making large gifts, and to make sure that the recipient of the gift, like Frederick’s daughter, is not left facing a significant tax bill.


Using a life assurance policy to plan ahead for an inheritance tax bill

One of the most cost-effective ways of avoiding an inheritance tax bill is to set up a life assurance policy that pays out if you were to die, with a sum insured that covers the potential tax liability. In cases where a large gift has been made, or could be made in the future, a ‘gift inter vivos’ policy can be created. Roughly translated, inter vivos means ‘between the living’, and it can be used to pay a lump sum paid in the event of a person’s death during a specific timeframe.

Most users of a gift inter vivos policy arrange for the policy to have a fixed seven-year term, with the amount of cover it provides reducing to match the reduced inheritance tax liability as taper relief starts to take effect. Although the cover reduces, the premium you can expect to pay for this type of assurance policy typically remains fixed for the whole seven years.


Considering the nil-rate band

However, before choosing to set up a gift inter vivos policy, it is important to determine whether the available taper relief will apply in your own particular circumstances. This is because any lifetime gifts made will first be allocated against your nil-rate band when the gift is made. This means that the initial impact of any gift you make, as well as any subsequent gifts, is that your nil-rate band will itself be reduced during those seven years, potentially increasing the inheritance tax liability due on the value of the estate during this time. It is also worth noting that taper relief is applied to the rate of inheritance tax, not to the value of the gift. So, if a gift falls within the nil-rate band, the rate of tax is zero and therefore taper relief has no effect.

Writing the assurance policy into trust

When we discuss setting up a gift inter vivos policy, we usually recommend that the policy itself is placed into trust. This ensures that the proceeds of a claim made on the policy are not included in the policyholder’s estate, which would otherwise increase the inheritance tax liability. Arranging the policy into trust also means the policy does not get caught up in the probate process, meaning beneficiaries should be able to get the policy proceeds quickly to settle the inheritance tax bill.



One of the most attractive things about gifting money to loved ones – perhaps to help with a house deposit or university fees – is that you’re able to play a part in their future now, rather than waiting till you die. But the rules around gifting, especially calculating the liability on lifetime gifts, can be a headache. Using a life assurance policy designed to cover the costs of that liability can really make a difference, and is a very effective way of removing the uncertainty that comes with making large gifts.

With more families likely to be caught in the inheritance tax trap – thanks to the frozen inheritance tax allowances – we expect such policies will prove increasingly popular with our clients.


If you are interested in discussing estate planning arrangements or your tax situation with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Multi- Generation Family Walking Along the Beach

Making tax-efficient gifts out of surplus income

By | Tax Planning

People often think that passing on large sums of wealth to loved ones is only possible after their death. But making regular financial gifts during your lifetime can be a highly tax-efficient way to reduce the value of your taxable estate, and give your loved ones a helping hand when they most need it.


Now that life is beginning to return to ‘normal’, at FAS we have started to see an increase in the number of clients who want to talk to us about planning for their future, making changes to their personal finances, and doing more to help their loved ones. One area that has been discussed with several clients is how to use their surplus income – in other words, money left over after all of their regular financial commitments have been met – in ways that benefit their family, friends, or even charities. Clients are keen to put that money to good use now, rather than waiting until it forms part of someone’s inheritance.


Gifting out of surplus income

Lots of people, particularly those in retirement with healthy pensions and other sources of income, such as rent on additional properties, may find themselves with income that’s surplus to requirements after all of their outgoings have been paid.

If you regularly have an income left over, it could be in your best interests to consider using this money to provide a regular financial gift. Not only does this allow you to make a financial contribution to an individual that could really benefit, but it is also a well-recognised and completely legal way of reducing the potential inheritance tax liability that will one day be calculated on the value of your estate. That is because whereas most gifts of large amounts can still be liable for inheritance tax, a gift made from surplus income is immediately outside of your estate for inheritance tax purposes.


A gift made from surplus income is not liable for inheritance tax

Here is why. In most instances, making gifts to friends or family of amounts of more than £3,000 runs the risk of incurring an inheritance tax bill. HMRC calls such gifts ‘potentially exempt transfers’ and applies the ‘seven-year rule’ when determining the amount of inheritance tax the gift can become liable for.

If the person making the gift lives for at least seven years after the gift is made, there is no inheritance tax to be paid by the person receiving the gift. However, if the person dies within the first three years of the gift being made, the gift could be liable to the full 40% inheritance tax charge, which is payable by the recipient of the gift. For gifts made between three and seven years before death, HMRC reduces the IHT charge for each full year the person who made the gift survives (known as ‘taper relief’).

However, one of the biggest advantages of making a gift out of surplus income is that there is no seven-year clock for the giver or the receiver of the gift to keep an eye on. But that is only as long as the Executors of the person’s estate can prove that the gift was indeed made from surplus income.


What are the rules around gifts?

To qualify as a gift made from surplus income in HMRC’s eyes, and therefore exempt from inheritance tax calculations, the following three conditions will need to be met:

  • There should be evidence that clearly shows the gift was intended to be made regularly and was part of the giver’s normal expenditure – a good example of this would be an annual amount of £3,600 gross paid into a grandchild’s pension.
  • The gift was made out of the post-tax income and was not the proceeds of a transfer of capital assets. Common sources of post-tax income used for gifts can include pension income, rent from property, interest and dividends, or even employment earnings.
  • The giver of the gift must still be left with enough of an income to maintain their present standard of living, without having to resort to using capital to meet their needs.


What kinds of gifts can be made?

As well as helping clients to set up regular cash gifts, we often talk to people who choose to use their surplus income to pay for school fees, to make regular payments into an Individual Savings Account (ISA) or Junior ISA, or even to fund pension contributions for children or grandchildren over several years. At FAS, we can help you to determine the level of surplus income available to you, as well as providing you with helpful advice on the best way to put that surplus income to work.

Make sure you keep records of any gifts you make

Whatever gifting option you choose, it is essential to keep financial records that can be used to prove your intentions after your death. Such records will be required by the Executors of your Estate to claim the ‘gift exemption’ from HMRC when it comes to valuing your estate. One of the easiest ways to do this is to write a letter to the person (or people) that you will be making gifts to, clearly stating your intentions and establishing a pattern of gifts for the future.


What happens after your death?

After your death, the Executors of your estate will be expected to demonstrate that the gift was intended to be both a regular occurrence and also a part of your normal expenditure. They will be required to complete Form IHT403, and provide details of sources of income (such as pension, rental, or investment income) and expenditure (such as household bills, holidays, and entertaining) for the years that any gifts from surplus income were made. If you intend to make regular gifts, it is a good idea to talk to us about dealing with the necessary paperwork on an annual basis that will make the estate handling process much easier when the time comes.



Rather than worrying about leaving an inheritance tax liability, making regular gifts out of surplus income can be an extremely effective way to reduce the taxable value of your estate. It is also a great way to do something meaningful for your loved ones, as you get to see them enjoy the benefits of their inheritance right now, rather than only after you have gone.


If you are interested in discussing estate planning arrangements or your tax situation with one of our experienced financial planners at FAS, please get in touch here.


This content is for information purposes only. It does not constitute investment advice or financial advice.

Receipt from HMRC reading Capital Gains Tax

Explaining the government’s Capital Gains Tax review

By | Tax Planning | No Comments

A recent review of Capital Gains Tax suggests changes that could rake in £14 billion in additional revenue for the Treasury. We look at the implications for you.


Chancellor Rishi Sunak has earned lots of praise for his wide-ranging and unprecedented measures to help the UK combat the damaging effects of the coronavirus lockdowns. But already he is looking at ways to pay for them. One recent review of Capital Gains Tax (CGT) has recommended cutting the annual CGT allowance, and changing the rates at which CGT is taxed – moves which could earn billions of pounds for the Treasury, but could result in headaches and higher taxes for many of us.


What is CGT?

CGT is the tax people are expected to pay on the profit they make when they sell or dispose of an asset. The tax is calculated on the gain that is made rather than the total amount received. For CGT purposes, ‘chargeable’ assets will include property that is not your main home, shares that are not held in an ISA, and most personal possessions valued at more than £6,000 (with the exception of cars).


What is the annual CGT allowance?

Everyone is entitled to an annual CGT allowance of £12,300. This means that you will only have to pay CGT if the gains you have made on your assets are above this amount. So, if you sold shares at a profit of £15,000 this year, you would only pay CGT on £2,700 (the amount over the annual allowance).


What is the CGT rate?

According to the Treasury, some 265,000 individuals in the UK paid a combined total of £8.3 billion in CGT in the 2017/2018 tax year (the latest available figures). By comparison, in the same tax year, more than 31.2 million taxpayers paid a combined £180 billion in income tax. Higher rate taxpayers are expected to pay CGT at 28% on gains made from residential property, and at 20% on gains from other chargeable assets. Basic rate taxpayers usually pay CGT at 18% on residential property gains, and at 10% on other assets. But that could all be set to change.


The CGT review

In early November, the Office of Tax Simplification (OTS) published its eagerly anticipated report into CGT, commissioned by Rishi Sunak back in July. The report suggests that current CGT rules are “counter-intuitive” and have created “odd incentives” in several areas. It noted that the annual exemption could also “distort investment decisions”, pointing to 2017-18 tax year data showing that 50,000 people reported net gains just below the annual threshold.

Among the report’s findings, it suggested that the government should consider reducing the £12,300 annual CGT allowance, reducing it to between £2,000 and £4,000. It also suggested aligning CGT rates more closely with Income Tax, in a move that could raise up to £14 billion for the Exchequer. For higher rate taxpayers, that could mean the CGT tax rate increasing from 20% to something closer to 45%.


Who should be worried about changing the CGT rules?

The OTS proposals would most likely affect individuals with second homes, as well as those with large share portfolios sitting outside of tax-efficient ISAs. The proposals are also likely to cause bigger problems for owners of small companies who hold large sums of cash within their business with the aim of using the cash as a pension when they retire. The OTS also suggested that business owners should pay Income Tax rates on share-based remuneration and earnings retained in their companies. Other recommendations included changing Entrepreneurs’ Relief — recently renamed ‘Business Asset Disposal Relief’ — with an allowance focused on business owners approaching retirement.


How concerned should you be?

Firstly, there is no guarantee that these OTS proposals will end up as legislation. Yes, Rishi Sunak is keen to raise money to fill the fiscal hole left by the Covid-19 crisis. But any far-reaching CGT reforms are likely to prove unpopular with voters, and in particular those entrepreneurs and small business owners that do so much for the UK economy – and have faced such a difficult 2020. For now, the Treasury is keeping its cards close to its chest, saying only that “The government’s priority right now is supporting jobs and the economy”.

Secondly, it is very difficult to make future tax revenue calculations based on a ‘discretionary’ tax such as CGT. If the annual allowance is set too low, or CGT rates are too high, it may encourage individuals to hold onto their assets instead of selling them. If fewer people end up paying CGT, then the Treasury may find their hoped-for additional tax revenue predictions were over-optimistic, and that the CGT reforms have discouraged taxpayers from selling their assets and “distorted investment decisions” even further.


What actions should I be thinking about?

It is hard to predict what the Chancellor will ultimately decide, but with a coronavirus vaccine due for widespread distribution in 2021, it is fair to assume that the government’s attention will be turning from supporting jobs and the economy towards attempting to pay down some of the debt that has been run up this year. So, we feel now may well be a sensible time to undertake a review of your existing investment portfolios, to consider your CGT position and ensure your investments are as tax-efficient as possible.

In particular, this is a good time to focus on investments that have been held for some time, which may carry substantial gains. Whilst CGT is only one consideration when deciding on appropriate changes to an investment portfolio, the result of the OTS review may well mean that now is an ideal opportunity to consider existing investment portfolios in light of potential changes to come.


If you are interested in discussing your investments or tax planning with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Getting the lowdown on BPR and trusts

By | Tax Planning | No Comments

We take a closer look at Business Property Relief, a little-known but incredibly useful planning tool when it comes to reducing inheritance tax, as well as explaining how it can be used alongside trusts for small business owners.

Did you know HMRC collected a staggering £5.2 billion in inheritance tax last year? In fact, every year, thousands of bereaved families find themselves facing an unexpected tax bill on their inheritance.

A quick reminder of inheritance tax facts

Inheritance tax is paid on the value of your estate when you die. Your estate could include your home, any other properties, savings and investments, and also any life insurance policies held in your name. Your estate will be completely free from inheritance tax if you leave it all to your spouse or civil partner. However, there may be an inheritance tax bill if you choose to leave some of your estate to family or friends.

If your estate is valued at less than £325,000 (known as the nil-rate band), there’s no inheritance tax to pay. However, your beneficiaries will be expected to pay inheritance tax at a rate of 40% on everything over that threshold. It’s important to remember that the inheritance tax due on your estate is paid by your beneficiaries (the people you choose to leave your estate to). They must pay the inheritance tax bill within six months of death being recorded.

Homeowners can also claim the ‘residence nil-rate band’, an additional allowance introduced in 2015. Provided the family home is left to direct descendants (children or grandchildren) a further £175,000 of inheritance tax relief can be claimed on the value of the estate. For married couples, any unused available reliefs can be transferred to the surviving spouse, meaning that it’s possible for a married couple to pass on an estate valued at £1 million, provided the family home is left to their kids or grandkids.

Could Inheritance Tax changes be on the cards?

There’s increased speculation that inheritance tax reliefs could be changing. The government’s response to the coronavirus – including furloughs for workers, business loans and grants and even ‘eat out to help out’ meal deals have cost the Treasury billions and blown a hole in the public finances.

As a result, there are concerns that Chancellor Rishi Sunak could be looking to claw back some of his ‘giveaways’ by closing some tax reliefs – with inheritance tax firmly in his sights. So, now might be a good time to think about ways to invest your money while making it exempt from inheritance tax – starting with Business Property Relief.

Understanding Business Property Relief

First introduced back in 1976, Business Property Relief (BPR) was brought in to make it easier for family business owners to pass on the ownership of the business to their descendants without leaving them with a large inheritance tax bill. But since then, BPR has expanded, and is viewed as a tax relief that encourages investment into trading UK businesses. Shares in a BPR-qualifying company can be passed on to beneficiaries free of inheritance tax. However, BPR only applies to trading businesses that meet HMRC’s qualifying criteria.

It’s worth knowing that you don’t have to be a business owner to be able to invest in BPR-qualifying companies, and there are a number of good investment management companies that give investors the opportunity to invest in portfolios of companies that qualify for BPR. As long as the investment has been held for at least two years, and is included as part of the estate, it can be passed on to the beneficiaries free of inheritance tax.

The key benefits of using BPR for estate planning is that it is flexible. Other ways of planning for inheritance tax – such as making lifetime gifts or placing money in a trust – means that you lose control over the assets. But if you’re considering investing in a portfolio of BPR-qualifying companies, it’s important to understand the risks involved. Your capital is at risk, and you may get back less than you put in. Shares in unlisted companies can also be more volatile and harder to sell.

Trusts explained

Setting up a trust can also help you to pass down more of your assets to your beneficiaries. Trusts are particularly useful where large sums of money are involved, where family relationships are a little complicated or where you don’t want children or grandchildren to receive the money until they reach a certain age.

There are many different types of trusts to choose from, but discretionary trusts are the most popular. Discretionary trusts are usually set up to provide money for a group of beneficiaries – for example, children or grandchildren, but a trustee is appointed to be responsible for managing the assets.

Any assets placed into a discretionary trust will be deemed outside of the estate for inheritance tax purposes, provided the person who set up the trust lives for a further seven years. However, inheritance tax may be payable (1) when the trust is created, (2) every ten years (known as ‘periodic’ charges) or (3) when trust assets are paid out to beneficiaries.

Combining BPR with a trust

If you’re a small business owner and you are planning on leaving your business to your spouse, you might want to consider combining Business Property Relief with a discretionary trust. This is a good way to ensure your estate will remain free from inheritance tax for your children and grandchildren, as well as for your spouse.

It is possible to arrange for shares in the business that qualify for BPR to be placed into a discretionary trust. A trust is a legal entity in its own right, which means that the trust ‘owns’ the business, rather than the surviving spouse. If the spouse chooses to sell the business, it won’t trigger a tax bill as the trust will own the proceeds of the sale, rather than the spouse.

Ready to have a conversation?

It’s not always easy to talk about what happens when you pass away. But you should have those conversations while you can, instead of leaving things till it’s too late. Estate planning can be complicated, and tax rules and tax reliefs are also subject to change. It’s important to sit down with one of our qualified financial planners who can explain the different options available to you, and work out a plan that will give you and your family peace of mind.

If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS, please get in touch here.

This content is for information purposes only. It does not constitute investment advice or financial advice.

Tips When Using Trusts for Inheritance Tax Planning

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Inheritance Tax is still a concern for many families, despite the new Main Residence Nil Rate Band adding up to £350,000 to the standard IHT threshold.

Making gifts or using Trusts usually take seven years to become completely free from Inheritance Tax (IHT). But an investment in a Business Property Relief (BPR) qualifying company can be passed down to beneficiaries free of IHT on the death of the shareholder, provided it has been held for at least two years at that time.

At FAS, we are strong advocates of using Trusts as well as BPR investments to mitigate a potential IHT liability and always give full consideration to both options when discussing Inheritance Tax Planning with our clients.


Don’t Give Away More Than You Can Afford

Trusts are a specialist planning tool that may not be suitable for everyone. We have prepared this guide to address some common questions, concerns and pitfalls that can arise when considering Trusts.

Remember, a Trust is a completely separate legal entity. Once you have gifted an asset into a Trust, it is no longer yours. In most cases, you cannot receive any benefit from the asset.

If you are thinking about gifting money into Trust, think about how much you would be prepared to give away without the Trust structure.

The main benefit of a Trust is that it gives you some control over how and when the gift is distributed. So, if you’re sure that you want to set aside £100,000 for your grandchildren, but don’t want them to receive it as a single lump sum when they turn 18, a Trust could be the answer.

But if there is a chance you will need the £100,000 to pay care home fees, a straightforward Trust won’t help with this.

There are certain Trusts which allow you to retain some access to the capital or to draw an income. These are known as Gift and Loan Trusts and Discounted Gift Trusts. However, these carry some restrictions, and may not be as effective for IHT purposes as a full Trust.

Trustee investments should be considered as part of your wider financial plan. A simple cashflow projection can help you decide how much you can afford (and are prepared) to give away.


It’s Not Just for Gifts

A Trust can be set up even if you don’t have any money to gift.

The simplest way to use Trusts in IHT planning is to ensure that your life insurance is payable into a Trust. This offers the following advantages:

  • No IHT when the benefits are paid out
  • No IHT on second death, as with the benefits in trust, the surviving spouse’s Estate has not increased in value
  • Benefits are paid out more quickly, bypassing probate procedures
  • Life policies can be set up for family protection, or specifically to cover an IHT liability.
  • Pension death benefits and employer death in service plans can also be paid into trust.


Absolute or Discretionary?

An Absolute Trust (or Bare Trust) works in the same way as a gift. The asset is earmarked absolutely for one or more beneficiaries under the terms of the Trust. There is no scope for the Trustees to apply their discretion.

This means that once the Trust is in place, you no longer have any control. However, the gift will drop out of your Estate after 7 years. The investment is taxed as if it belongs to the beneficiary.

A Discretionary Trust, as the name implies, allows more control over the investment. The Trustees can decide how and when to distribute the money. The beneficiaries can also be changed or selected from a particular group.

However, a Discretionary Trust offers certain disadvantages:

  • If the gift is over £325,000, IHT of 20% applies immediately. A further 20% is then due if you die within 7 years.
  • Further IHT charges apply every 10 years. This is broadly 6% of the value over £325,000, with adjustments made for any withdrawals taken.
  • Exit charges may also apply when money is distributed from the Trust.

These points can mostly be mitigated with proper planning. But considering that larger Trusts in particular may incur additional fees in respect of legal and tax advice, a Trust can prove very expensive.


IHT is Not the Only Tax

Discretionary Trusts are subject to higher rates of tax than individuals.

Income is taxed at 20% on the first £1,000 only. Thereafter, income is taxed at 45% – an individual would need to earn £150,000 before paying this rate of tax.

If the Trust realises a capital gain, the first £6,000 is exempt from tax. This is half of the allowance available to an individual investor. Any gains over this amount are taxed at 20%, the same rate payable by a higher rate taxpayer.

Detailed planning is required to make sure that the strategy works, taking all taxes and costs into account.


The Investment Strategy Matters

The portfolio selected for a Trust investment may be different from an individual’s own funds.

It could be appropriate to use a higher risk portfolio on a Trust, to maximise the growth potential so that the money can last for several generations. Alternatively, the money might be required in the short term to provide an income, in which case a lower risk strategy would be suitable.

Taxation is an important factor. Using an Investment Bond as a wrapper for the investments can be effective, as there are no tax implications unless money is actually withdrawn. This means that funds can be switched within the bond without worrying about Capital Gains Tax. Similarly, interest and dividends produced within the funds are not only free of tax, but do not need to be declared on a tax return.

Bond withdrawals can result in unintended tax consequences, so it is always best to speak to one of our Financial Planners before proceeding.

A Trust can be an effective way of mitigating an Inheritance Tax liability, but you should always take financial (and sometimes legal) advice to ensure it is the right course of action.

Please do not hesitate to contact a member of the team if you would like to find out more about Inheritance Tax Planning.

How to Ensure Your Wealth Passes to Your Loved Ones

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Keeping wealth within the family is desirable but not always easy to plan. There is a myriad of Inheritance Tax (IHT) rules to mitigate and these are often complicated and subject to change. As Financial Planners, we are here to help clients navigate this complex landscape and leave a meaningful legacy for their loved ones, without paying unnecessary tax.

In this short guide, our financial planning team will be sharing some ideas on how clients with complex estates can leave their wealth to younger generations.


The Nil-Rate Band

The Inheritance Tax (IHT) threshold, also known as the nil-rate band (NRB) refers to the threshold after which you start paying IHT (usually 40%) on the value of your estate. In the 2019-20 tax year, this is set at £325,000 and includes the value of your home. So, if your estate is worth £500,000 when you die, then £175,000 is potentially liable to be taxed at 40%.

However, there are a number of IHT rules which can affect your threshold, and how much you pay. First of all, married couples and civil partnerships can inherit any unused IHT allowance from their deceased spouse. If they have not previously used any of this allowance, then the surviving spouse can effectively “double” their IHT threshold to £650,000.

Secondly, there is also an important caveat regarding your home. If you pass on your family home to direct descendants (e.g. children or grandchildren) when you die, then you can raise your IHT-free threshold using an additional nil-rate band (ANRB). In 2019-20, this allows each individual to pass on an extra £150,000, tax-free.

Again, married couples and civil partners can combine their ANRBs to potentially shield £300,000 of property value from the tax man. It’s also worth noting that this threshold will be raised to £175,000 in April 2020, which could allow couples to pass a £1m estate to their direct descendants completely free of IHT. For many people living in the South East this is welcome news in light of rising property prices, which might have tipped their estate over the IHT bar.



It may sound strange to focus on pensions in an article about estate planning, but they can be a vital tax-saving tool. Under current rules, your pension is excluded from the value of your estate for IHT purposes, allowing you to potentially pass hundreds of thousands of pounds to your loved ones without these funds being potentially liable to IHT.

However, you do need to be careful with this and we recommend speaking to one of our experienced financial planners to ensure your pension is properly integrated into your estate plan. For instance, final salary pensions rarely (if ever) can be inherited by children, although there are often reduced benefits for a surviving spouse. Your state pension, moreover, cannot be passed down to your children or to your husband, wife or partner.

It is those with defined contribution pensions who can primarily make use of this part of the IHT system. Even then, however, there can be tax implications. If you die before the age of 75, for example, then under current rules your beneficiaries can receive any pension funds tax-free. If you die after this age, however, then it might affect their Income Tax bill (possibly pushing them into a higher tax bracket).


Other areas

There are a range of other IHT-mitigation tactics open to people with complex estates, depending on your personal circumstances:

  • For those interested in small businesses or startup investing, the Enterprise Investment Scheme (EIS) may be worthwhile considering. Here, you can invest up to £1m per tax year into EIS-qualifying companies and receive up to 30% tax relief against your Income Tax bill. Provided you hold your EIS shares for at least two years, these can also be passed down to beneficiaries, IHT-free.
  • Trusts can be a great way to reduce IHT whilst retaining a degree of control over your assets. Not only can this help to protect your child’s legacy if your surviving partner decides to later remarry, a Trust can help you control how the money is spent on you children and grandchildren. However, make sure you seek independent financial advice before committing to a Trust, as these come in different forms with a variety of rules.
  • Life insurance is also an option to consider, as the payout from your policy can be used to cover a potential future IHT bill. Bear in mind that you need careful financial planning if you are considering this, as the insurance policy itself can be included in the valuation of your estate (e.g. if it is not properly written into a Trust). You also should speak to us to ensure whether an insurance policy makes financial sense for you. In some cases, it might be cheaper to simply pay the future IHT bill than pay for the policy.

Do give us a call if you wish to discuss this area of advice in more detail!