Owning a business and planning for inheritance tax
Running a business is all-consuming and this often means that business owners fail to consider their personal circumstances as a result, more specifically inheritance tax. Planning ahead for inheritance tax brings with it a number of benefits.
The value of an estate for inheritance tax can be reduced significantly if lifetime gifts are given. Instead of making lifetime gifts to individuals, gifts can be paid into a trust. Gifts such as these can give the settlor the opportunity to benefit from the income if the gift is invested and this offers them control.
This is because the trustees manage the investments on behalf of the beneficiaries while a settlor can also become a trustee. By putting a trust in place it enables you to protect assets.
Continuing to control assets
Many of the advantages that were once available to trusts have been removed throughout the years and that is why trusts are now used for tax saving reasons. A trust is mainly set up these days to protect the wealth of a family through passing it on to younger members of a family. Assets will be protected from excessive spending as well as divorce which is what could occur if an outright gift was made.
Repercussions of inheritance tax
A gift that is made to an individual could be a potentially exempt transfer and as a result of this, it is possible to make a gift of any amount on the proviso that you live for a further seven years, if this is the case then inheritance tax will not have to be paid.
If a gift is made into a trust, then it is not a potentially exempt transfer making it a chargeable lifetime transfer. Therefore, it will be susceptible to an inheritance tax charge which is set at the lifetime rate of 20%.
There are tax advantages when putting assets into a trust such has having the hold over capital gains, this change in the inheritance tax will mean that there is a limit to the amount that settlers will put into a trust of £325,000 during every seven-year period.
Income from trusts
Trusts are taxed at 45% and there is also a requirement to submit a tax return in order to declare it's taxable income.
For many, this can cause hassle but there is a 45% tax rebate on any income passed on to beneficiaries. If the beneficiaries do not pay tax or if they fall into the 20% tax bracket, then they have the ability to reclaim the tax.
There are other tax advantages based on the age of the beneficiaries and the tax that they pay. Therefore, there are those who can take advantage of it such as grandparents to cover the costs of school or college fees.
Essentially, when it comes to creating a trust, there are limitations to the advantages available but they do offer an element of protection when it comes to preserving wealth.
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About Javeed Baig
Javeed Baig is a senior accountant and managing director of Gower Accountancy, a Leicester based accountants who provide their services to a range of sectors from doctors and dentists to the motor trade and website developers.