Life & Culture

Protecting your pension

Couples should plan carefully to make use of the nil-rate band


A Canada Life survey revealed 77 per cent of us think the UK’s inheritance tax rules are too complicated but only 33 per cent have sought professional advice. Inheritance tax planning is a sensitive subject. Early preparation is the key to success.


Exempt from IHT

Every UK individual is entitled to leave an estate worth up to £325,000. This is known as the “nil-rate band” and is transferable to your spouse/partner on death.

This means when you die, your combined estate may be valued up to £650,000 before facing an inheritance tax liability.

Anything above is taxed at 40 per cent. Leaving a sum to charity can reduce the inheritance tax liability.


Steps to mitigate IHT

If you die without having made a will, you are not making the most of inheritance tax exemptions. Relatives other than your spouse or partner may be entitled to a share of your estate, which could trigger an inheritance tax liability.


Residence nil-rate band

Rising house prices may cause your estate to exceed the NRB but the new RNRB can now be claimed. It is available only if the deceased’s main residence is passed to a direct descendant. The allowance will reach £1 million in 2020. RNRB will be tapered by £1 for every £2 where an estate is worth over £2 million. RNRB is transferable between married couples/civil partners.


Lifetime gifts

Gifts made within seven years of death will be treated as potentially exempt transfers and those made more than seven years before death are IHT-free. Care needs to be taken if you are giving away your home to your children with conditions, or you give it away but continue to reside there.


Establish a trust

Family trusts can reduce IHT, making provision and protecting your spouse, children or business. Trusts enable the donor to control who benefits and under what circumstances; an outright gift offers the donor no control.

A trust is a legal arrangement and appointed trustees have responsibility to manage the trust assets on behalf of the beneficiaries, in accordance with the trust terms.


Bare trust

The settlor (the person who settles the assets in trust) decides on both the beneficiaries and their shares. The trustees (the assets’ legal owners) are responsible for managing the assets and distributing them to the beneficiaries. There are potential income tax/capital gains tax benefits. However, if a parent creates a bare trust for their minor/unmarried child, with gross income more than £100 per annum, all income will be taxed on the parent.


Life interest trusts

A beneficiary will be entitled to income from the trust fund while alive, with capital going to another on death. This is used in will planning to provide security for a spouse, with capital preserved for children.

Also it can pass income from an asset to a beneficiary without losing control of capital, specifically useful with children from a previous marriage.


Discretionary trusts

The settlor decides who benefits from the trust, but the trustees use discretion to determine who, when and in what amounts beneficiaries benefit. This provides maximum flexibility compared to other trusts.


Adrian Duke-Cohan is director of Dukes IFA, 0203 824 2242,

The above information is based on our understanding of the 2018/19 HMRC rules. Levels, bases and reliefs from taxation are subject to individual circumstances and may change. The Financial Conduct Authority does not regulate taxation, trust advice and will writing. The value of units and the income derived from them may fall as well as rise

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