Conal Gregory: Why it pays to look for the best advice on inheritance planning

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Planning where to leave your assets should be undertaken with the best professional advice and never left too late. Despite increasing longevity, it makes sense to make a will as early as possible and to accompany it with arrangements for your estate.

Earlier this month the Treasury revealed inheritance tax had jumped £400 million in just one year. 17,900 bereaved families had paid £3.05 billion, which was a 15 per cent rise. This amounted to £170,000 on average with the Government taking 40 per cent of money and property above the £325,000 threshold.

The sum levied showed an increase of almost £5,000 per individual in one year, according to Prudential.

Specialist advisors say that many families could have drastically reduced the tax they had to pay if proper planning had taken place.

Clearly much of the reason for the hike in value is rising property prices. The average UK home now costs £284,000, according to the Office for National Statistics and higher still at £298,000 for England with 5.6 per cent annual price inflation.

Inheritance tax (IHT) is levied at 40 per cent on assets above £325,000 which is a level that has been in place since 2009 and will remain until 2017/18 tax year but will then gradually increase to £500,000 by 2020.

The Government has introduced a ‘main residence’ allowance where the property can be passed to children or grandchildren from April 2017. Adrian Lowcock, Head of Investing at AXA Wealth, says, “The rules are very complex. Those with estates over £2m will have a tapered allowance whilst those who downsize will get an inheritance tax credit.”

The effect is that a married couple could have a combined IHT allowance of £1m in 2020.

Couples who jointly own property need to decide on which legal path to take: ‘tenancy in common’ means each owns a divided share and can leave it to whoever they specify in their will whilst ‘joint tenancy’ means the survivor inherits the other’s share automatically.

For IHT, assuming the survivor inherits a property, there is no need for a nil-rate band trust in a will as the survivor can benefit from the unused part of the first to die. A married couple have a joint nil-rate band of £650,000 which is freely transferable.

If a home is given away to children but the parents continue to live in it, a full market rent must be paid to exempt it from IHT and the rent is taxable.

If you would prefer to release cash from bricks and mortar now to use personally, such as on holidays, as well as to give away, then equity release could be beneficial as the cost will reduce the sale proceeds going to your heirs. Interest is typically six per cent on the sum released and rolls up until either death or a permanent move to a care home.

Lowcock gives five tips to be as tax efficient on inheritance as possible:

- The sooner IHT planning is started, the more efficient it can be

- Pay into a pension plan since pension death benefits are generally IHT-free

- Give to family members and friends

- Use the annual exemption of £3,000 (for an individual)

- Trusts should be considered

If the annual allowance has not been used in the last tax year, it can be carried forward one year. Trusts are helpful devices in estate planning as they allow you to transfer money, property or other assets outside your estate into the legal ownership and control of other people – termed trustees – who you appoint.

Any assets given away are free from IHT after seven years. Even with a trust, if you die within seven years, the assets become taxable and gifts made in the preceding seven years are treated as your assets for IHT calculations.

Money donated to charity is exempt from inheritance tax and if 10 per cent of an estate is given away, the tax on the remaining part is reduced to 35 per cent.

Shares quoted on the Alternative Investment Market (AIM) which are held for a minimum two years are exempt from IHT. Within an ISA, they are also free from capital gains and income taxes. However, these traded securities are usually smaller companies and can be volatile. There have been some spectacular failures.

David Battersby, Investment Manager at Leeds-based Redmayne-Bentley, says that one of the appealing aspects of AIM shares is that they can traded without paying stamp duty.

To qualify for exemption, an AIM share should not trade in securities, deal in land or building or make or hold investments. “There is no definitive list and it is important that investors check for dual listings, a move to a full listing, a change in business direction or holding too much cash without an identified future use – all of which would make your investment not suitable for business property relief,” advises Battersby.

An example of how someone could unwittingly become caught would be where a firm went into mining. Companies which hold mines as a financial asset on their balance sheets are ineligible for IHT relief.

The stockbroking firm of Charles Stanley offers a specialist IHT service, based on holding AIM shares. Comparing performance of its IHT portfolio for the period July 2012-June 2015, the increase was 91 per cent. By comparison, the FTSE All-Share rose 22.8 per cent and FTSE AIM Index by only 9.6 per cent.

Over 12 months to the end of September, these three investment routes had startlingly different results: a rise of 3.6 per cent and fall of 6.6 and four per cent respectively. Charles Stanley accepts portfolios from £80,000 and charges 1.25 per cent plus VAT annually (minimum £600 plus VAT) with one per cent commission for purchases and sales.

Two AIM stocks worth considering, according to Battersby, are Clinigin, a global pharmaceutical service, and Epwin, a manufacturer and supplier of low maintenance, PVC building products.

Do not forget to obtain a power of attorney so that, in the event of incapacity, the person you wish to appoint can make investment and other financial decisions on your behalf. Such an arrangement can be effected at low cost through a solicitor.

The intestacy rules changed a year ago. If a children individual dies without a will, a surviving spouse or civil partner inherits everything. However, if there are surviving children, a statutory legacy of £250,000 is paid to the spouse or civil partner in addition to personal effects and half of everything else.

The offspring receive the remaining half-share in trust until they reach 18 years but there is no right to inherit if the surviving partner was not married or in a civil partnership.

Key considerations

- Make a will and establish a power of attorney

- Keep giving away assets which become free from IHT after seven years

- Seek professional legal, investment and tax help

- Consider AIM shares and hold for at least two years

- Reduce property value through equity release