The price of wealth
Failure to plan could be costly

Wealth protection planning is the process of reviewing your complete financial situation and creating a step-by-step strategy to shield and preserve your wealth from all potential threats. Let’s take a look at some of the basic elements that you should consider.

Making a Will

Without a Will, the state decides who receives the money and assets in your estate. When this happens in England and Wales, your spouse takes the first £125,000 as well as your personal possessions and an interest for life in half the balance. The rest goes in equal shares to your children.

It is also important to consider the effects of inheritance tax (IHT) in the event of your premature death. The rules on IHT received their biggest overhaul in more than 20 years following the Chancellor’s Pre-Budget Report when he announced that the threshold at which the 40 per cent duty is levied on inherited assets was to be raised for married couples and civil partners from £300,000 to £600,000. Mr Darling also said this threshold would rise further to £700,000 in three years’ time.

Assets left by a husband or wife to their spouse have always been free of IHT tax, no matter what their value. However, when the second spouse died, they could only use their own tax allowance of £300,000 when leaving their assets to their family. With property prices rising sharply in recent years, many bereaved families have lost out to IHT.

Following Mr Darling’s announcement, couples whether married or in a civil partnership can merge their two tax-free allowances of £300,000 to create a larger allowance of £600,000. Mr Darling said the announcement would benefit 12 million married couples and civil partners. This figure includes an estimated 3 million widows and widowers, who may now be able to take advantage of the combined allowance and make backdated claims.

Immediate tax savings

Where husbands and wives or members of civil partnerships trust each other sufficiently to equalise assets, they may even achieve immediate tax savings through making more use of the personal allowance for income tax, currently £5,225 per person aged under 65, and capital gains tax of £9,200 per person during the tax year ending on 5 April 2008.

It can be good to give

You can give money and assets away before you die but there are strict limits under the IHT regime. Each person can give away £250 a year to any number of people as well as £3,000 in total annually to different people. If you didn’t use the £3,000 allowance last year, you can give away an extra £3,000 this year. There are no limits on the amount you can give away regularly out of your income, but it must not reduce your lifestyle. It’s important to keep records of your expenditure, as your remaining income has to be sufficient to cover your expenses. It is also important to record what you’ve given away.

A matter of trust

When you die, providing your life insurance is written under an appropriate trust, it will automatically pay out to the beneficiaries without having to go through the IHT regime. The death benefit passes directly to them without being counted towards your estate.

Passing pensions

Employers’ pensions are normally written in trust, meaning that any death-in-service lump-sum payment passes directly to whoever you nominate, but this is at the employer’s discretion. Pension benefits for a widow or widower do not affect IHT, although they may be subject to income tax. Personal pensions should be written in trust, too, so that the pension savings can pass tax-free to whoever you wish.

Investing tax-efficiently

Several investments are free of IHT after they have been held for two years. These are shares quoted on the Alternative Investment Market (AIM), forestry land, farming land, provided you farm it rather than rent it out, and partnerships or shares in a private business. These types of investments may not be suitable, and individual advice should be sought regarding these types of contracts.

Potentially exempt transfers

Potentially exempt transfers (PETs) are gifts of assets, cash or property you make before you die but you have to survive for seven years before they become IHT-free. After three years, the beneficiary may get some tax relief which can increase each year until the seven years is up. However, if the gift is less than the nil-rate band the whole amount is added back into your estate when calculating how much you owe in death duties.

If you require any further information about the services that we provide or would like to review your financial planning position, please email or contact us.

Levels and bases of, and reliefs from, taxation are subject to change.