Inheritance Tax
Protecting your assets for the next generation

The number of individuals caught by Inheritance Tax (IHT) is at an all-time high, so it is worth understanding the main exemptions

Marital Status: Transfers between spouses or civil partners made both during life and on death are exempt from IHT.

Nil-Rate Band (NRB): The value of assets that, on death, can be passed to beneficiaries free of inheritance tax. Since 2009 the NRB has been frozen at £325,000. For married couples and civil partnerships, any allowance that remains unused on death can be transferred to the surviving partner, meaning qualifying survivors can pass up to £650,000 to beneficiaries free of IHT.

Main Residence Nil-Rate Band (RNRB): Property price inflation is one of the key reasons IHT is now applicable to more individuals than ever. To help counter this the Government introduced a RNRB in 2017, which provides married couples and civil partners an inheritance tax-free allowance of £1m when combined with their existing NRB. The allowance is tapered away on a 2:1 basis for estates with a value of over £2m.

Annual Exemption: Individuals may make transfer exempt from IHT up to £3,000 in any one tax year with the ability to carry forward the previous year’s allowance for one year if not already utilised.
Small Gifts: Individuals may gift up to £250 to any number of parties (other than an individual in receipt of the annual exemption) in any one tax year.

Normal Expenditure: An often-overlooked exemption, if a transfer is part of a donor’s normal expenditure, is made out of income and doesn’t affect their usual living standard, it will be exempt from IHT. This area of planning can be quite complex so financial guidance should be sought.

Wedding Gifts: Donors can gift £5,000 if parent to either party, £2,500 if grandparent and £1,000 if any other person.

Business Relief (BR): A tax relief provided by the UK Government as an incentive to increase investment in certain types of trading businesses.

Pensions: There is a common misconception that assets left in an individual’s pension will be free from tax when passed to their beneficiaries. Whilst true for IHT, it is important to consider the wider tax implications such as the type of pension and when the proceeds can be passed without the beneficiaries having to pay income tax.

We spend our days helping clients with estate planning and Inheritance Tax.

Contact us or book an initial consultation here at Penn Barn to find out how we can help you.

By Philip Harper  |  June 2023

Find your lost pensions

House moves, career moves, busy family lives – it’s easy to lose track of pension savings. Failure to keep tabs on old workplace pensions has led to over 2.8 million pension pots worth £26.6 billion being misplaced or forgotten about, according to The Association of British Insurers (ABI).  This is hard-earned savings that you could be missing!

Use the government free Pension Tracing Service to help you find lost pension savings.  The service is simple to use and provides trace results immediately. Enter your former employers’ details into the online database and you’ll be provided with contact details for pension schemes you may have paid into.  It will search a database of more than 320,000 pension scheme contact details.

Another best practice, we would recommend is to combine multiple pensions into a single pot, this makes it simpler and easier to manage and may also reduce costs.  Contact us and we’ll conduct a free pension review and advise the best approach for you.  If it does make sense to move your pensions, we’ll provide you with an initial report free of charge.

By Philip Harper  |  March 2024

Many people overestimate how much they spend on retirement

Many people overestimate how much they’ll need to live on in retirement, thinking that they’ll spend the equivalent of their wages.

 Another common perception is that you’ll need between half and two-thirds of the final salary you had when you were working, after tax, to maintain your lifestyle once you retire. This assumes however that the mortgage has been repaid, you are no longer bringing up children and of course you won’t face the cost of commuting once you’ve retired.

Which magazine conducted a survey in April 2022 to help figure out how much individuals need in retirement. Households with two people spent a shade under £2,340 a month, or around £28,000 a year, on average to be ‘comfortable’. This covers all the basic areas of expenditure (which had a combined cost of £19,000 per year on average) and some luxuries, such as European holidays, hobbies and eating out. Aiming for this level of income will provide a good platform for your retirement. You’d need £45,000 a year if you include luxuries such as long-haul trips and a new car every five years. Travelling and holidays are a very important part of retirement, with people spending on average £4,657 a year on this part of their life.

 “61% of under 65-year-olds have no idea what their retirement income will be. ”

 Priorities change slightly as you move through your retirement years. People tend to spend relatively less on food and drink, housing payments and recreation as they get older, particularly over the age of 80, but more on utility bills, health, and insurance premiums.

Since the research individuals would have undoubtedly spent more on energy, food and petrol.

By Philip Harper  |  June 2023

Using Business Property Relief (BPR) to help provide relief from inheritance tax

It allows certain investments to be left to your beneficiaries free from inheritance tax.

BPR was introduced in the 1976 Finance Act.  It was created to allow small businesses to be passed down through generations without facing a large inheritance tax bill.

Over time, successive governments have recognised that tax breaks are the best way to encourage people to invest in trading businesses, regardless of whether they run them themselves. These incentives can compensate for some of the risks associated with investing in such companies.

Why hold shares in BPR-qualifying companies?

• Faster inheritance tax exemption: Whereas making a gift means they take seven years before becoming exempt from IHT, investments in a BPR company are exempt after being held for just two years, provided the shares are held at the time of death.
• Greater access and control: Unlike a gift, the investor retains control over the investment and can sell it if they need to. Money taken out of the investment however will no longer be exempt from inheritance tax.
• Simplicity: Buying a BPR investment is relatively simple compared to setting up a trust as there are no complex legal structures.

What are the risks?
The value of a BPR investment will depend on the performance of the companies it invests in and you may get back less than you invest. Tax rules can change and investments in AIM-listed companies are likely to fall or rise more than shares on the Stock Exchange. There are however more products being introduced which focus on capital preservation and are primarily linked to the returns associated with renewable energy.

Choosing the right investment can be complicated which is why it is vital to seek advice from an independent adviser.

By Philip Harper  |  June 2023

Is it wise to hold individual shares?

A question we are often asked by clients is “Should we keep our share portfolio?”

 In the 1960’s and 70’s it was quite common to buy a basket of blue-chip shares, sit back and enjoy some consistent growth and useful dividends and these portfolios were often passed down through generations. Sadly, the phrase ‘blue-chip’ share is all but gone, with virtually all shares globally seem subject to increased volatility. Even the solid names like BP, M&S, Rolls Royce and Lloyds Bank have had their well-publicised crisis points.

Many employed clients might have the option to purchase their company’s shares at a discount and this can provide some excellent opportunities. One risk to consider however is under-diversification – it’s never smart to put too many of your eggs into one basket. When you invest in the company where you work, your finances are doubly exposed. In the event your employer falters, not only might your investments tumble, but you might also find yourself out of work at the same time. Just ask former employees of Enron and very recently, Credit Suisse, who watched shares in their company plummet, while facing job uncertainty.

Our preference is to encourage clients to ‘manage out’ their shares and this is a method of swapping shares for funds, which we believe are far more appropriate and where the control of risk can be introduced. We may need to manage the process over a number of tax years if Capital Gains Tax is a consideration, but the long-term result is often highly beneficial.

By Philip Harper  |  April 2023

Your retirement journey starts right now!

There was a time when retirement seemed to take care of itself. It was normal to work, retire and then receive the state pension plus a company pension scheme. For most people now, this route simply doesn’t exist. Saving for a “pension” can mean a multitude of different things and the way your savings are organised can make a big difference to whether or not you are able to do what you planned in your life, and also how your money is treated once you die.

 The 2015 changes to the “at retirement” rules vastly increased flexibility and brings with it a new era of personal responsibility in retirement.

 Working beyond state pension age is no longer an exception and it is becoming increasingly common to consider downsizing or releasing equity in their home as a part of their retirement planning.

Far more choices will have to be made and the answers themselves become less obvious. How do you best invest your savings? How do you want to take income in the future and what happens to your assets when you die?

The new normal requires a plan. Having a plan not only helps you understand what you are aiming for, but regularly reviewing that plan enables you to check you are on track.

By Philip Harper  |  October 2022