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Back to Basics: Estate Planning

Want to legally reduce your tax bill? Tilney's Head of Estate Planning Ian Dyall tells us how - and warns investors to make sure they balance their needs

Emma Wall 10 March, 2017 | 8:00AM

This week as part of our Guide to ISA Investing we reveal the top rated and top performing stock and fund ideas – as well as sharing where the experts stash their cash, the latest news from the 2017 Budget Report and how to reduce your tax bill.

 

 

 

Emma Wall: Hello, and welcome to the Morningstar series, "Ask the Expert." I'm Emma Wall and I'm joined today by Ian Dyall, Head of Estate Planning for Tilney.

Hello, Ian.

Ian Dyall: Hi there.

Wall: So, we're going back to basics with estate planning and tax-efficient investing this week. What are the basics of reducing your tax bill and estate planning?

Dyall: Well, I suppose the driving principle with estate planning is to try to balance the access that the clients are going to need with their own assets in order to pay for care, maintain the standard of living whilst at the same time saving tax. And as a general rule, you're trying to find optimum balance between tax saving on the one hand versus access on the other hand.

Wall: And say, I have put a pot aside to pay for perhaps any long-term care I may need, to sustain that standard of living that I've got used to and I have some extra money that I'd like to be tax-efficient with. What's the first step?

Dyall: That's where it gets more complicated. There's a huge array of options available. But actually, I would say that if you distill it all down, there's really only three things you can do about saving tax. The first is to make best use of your allowance, using your reliefs, the big ones there being the nil rate band and the residence nil rate band and often that's done by the wills.

The second thing is to reduce the size of the estate and that could be spending more money if you're holding back artificially or it could be giving money away and that's where trusts can often come in as well to protect that money.

And then the third area really is to cover what remaining liability there is using life cover because that's a much more efficient way of paying the liability and it gets around a bit of a cash flow issue on death where tax has to be paid before probate can be granted, before assets can be released, et cetera.

Wall: And you mentioned reducing your estate there. Presumably that's to do with gifting and looking after generations that are to come?

Dyall: Yeah. I would say one of the simplest methods of saving inheritance tax is to give away, just to make an outright gift of money to your beneficiaries. The difficulty with that is I knowing how much you can afford to gift and being many people are uncomfortable about releasing the control of that money maybe for just psychological reasons, they're just worried about affordability, but it could also be that they are worried about their beneficiaries getting divorced or becoming bankrupt or maybe they are just not good with money. So, that's where trusts can come in because it allows you to give away assets but retain some form of control over those assets.

Wall: And what are the restrictions towards gifting money. There's a seven-year rule, isn't there?

Dyall: Yeah. Generally, if you make a gift, you need to live for seven years after making that gift for it to fall outside of your estate. There are certain small exemptions. GBP3,000 a year you can gift to anyone, for example. And if you've got excess income that's quite an useful one. So, more income than you can actually spend, then provided you make regular gifts, so it can't be a one-off gift, so annually or frequently, and it doesn't affect your standard of living, that too is exempt. So, if you have got more income than you need rather than let it build up in your estate, you're able to give that away as well.

Wall: And you mentioned trusts. How easy is it to set up a trust and are there any restrictions around that because I imagine some people would be tempted to retain control over a trust but then that isn't really a gift, is it?

Dyall: No, you got to be careful. If you retain too much control over trusts, then it can be seen as a sham. But trusts can be fairly simple to set up. Many life companies have off-the-shelf trusts available to use with their products. And most of this does – if you set up a straightforward discretionary trust, that's a fairly simple trust to set up. And then in terms of running the trust from that point onward it's as easier or as complicated as you want to make it.

If you hold simple assets in the trusts, it can be fairly simple and cheap. If you want to hold a property portfolio, which needs maintaining and rent collecting, et cetera, that becomes much more complicated from an administrative and a tax perspective.

Wall: Now, we've got a new tax year starting in a couple of weeks. We had the budget this week, but it didn't have too many surprises. But there are some changes coming in, in April, aren't there?

Dyall: Yeah. And probably the biggest one in terms of inherence tax is the residence nil rate band. So, if you cast your mind back, the government was promising £1 million nil rate band at one point in time. That's slowly being watered down frankly to what we have now, which is, if it's £1 million between a couple, the way that's made up of is that in 2021 you will have your personal nil rate band of £325,000 for husband, £325,000 for wife, that's £650,000 in total. And then you'll have an additional nil rate band which starts this April at £100,000 each, but will climb to £175,000. And if you add two lots of £175,000, two lots of £325,000 you magically come up with this £1 million figure.

The thing that people need to be careful of though is it's not as generous as it sounds. There are rules around it. So, you can only use it against the residence that is part of your estate on death. That can't be a rental property. It's got to be somewhere where you live.

Wall: So, no buy-to-let properties.

Dyall: Yeah, correct. And secondly, it has to be what they call closely inherited which means you got to leave it to a child, grandchild, stepchild…

Wall: Immediate family.

Dyall: Exactly. It can't be nephews and nieces. So, that's the one that people need to watch out for. And it's also means tested. So, if your total estate is worth more than £2 million, then for every £2 you are over that figure you lose £1 of the residence nil rate band allowance. So, for many people they need to be careful of assuming that they are going to get that when actually in many cases, they won't.

Wall: Ian, thank you very much.

Dyall: Thank you.

Wall: This is Emma Wall for Morningstar. Thank you for watching.

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About Author Emma Wall

Emma Wall  is Senior Editor for Morningstar.co.uk