Cash Q&A: Protect your wealth by placing some faith in articles of trust

Q: I have been the managing director of a successful business for more than ten years and I have been made an offer to sell the company, which is worth more than £7 million. If I sell, the value of my estate would increase dramatically, and I have no measures in place to mitigate my inheritance tax (IHT) liability. What is the best way to do this?

AK, Edinburgh

A: As the value of your estate will significantly increase upon the sale of your company, it is imperative that legal, tax and financial advice is taken before you make any decisions.

Gifting is one way to reduce the value of your estate and, in turn, cut your potential IHT liability. There is an annual exemption for lifetime gifts of up to £3,000. This annual exemption can be carried over to the next year if you don’t use it, but not to any subsequent year. If unused, both this year’s and the previous year’s allowance can be given away to the same person. Any gifts made to your spouse or civil partner are not liable to IHT as long as they have a permanent home in the UK.

Gifts to charities are also exempt from IHT, regardless of the amount of the gift – provided that certain statutory tests are met.

Please note that any gifts you make to individuals will be exempt from IHT as long as you live for seven years after making the gift. These sorts of gifts are known as “potentially exempt transfers” (Pets). However, if you give an asset away at any time, but keep an interest in it – for example you give your house away but continue to live in it rent-free – this gift will not be a Pet.

It can occasionally be beneficial to divide assets equally between spouses, particularly if one spouse is a non-taxpayer and has little or no capital assets.

Transfers between spouses are exempt from IHT and this can constitute a first step in a lifetime IHT planning exercise.

Setting up a trust is another option.

Once money or property is placed into a trust it ceases, after a period of time, to form part of the settlor’s estate but depending on the amount settled into the trust, the settlement may result in an IHT liability.

The downside of a trust is that the individual loses direct control over this cash or property, although there are ways to address this.

Bear in mind that a trust would generally have to be set up using a single initial injection of capital as instalment payments to trusts can, depending on the type of trust vehicle, result in each payment being treated for tax purposes as a new trust.

A further way to mitigate your potential IHT liability is to have a life assurance policy in place. There are many options involving whole of life policies, which could be investment backed or guaranteed.

These policies are designed to pay out a tax-free lump sum on death and if written under trust, which I would strongly recommend, should pay for any potential IHT liability.

Generally, policies that pay out on death should be written in trust to someone other than the surviving spouse in order to alienate the pay-out from the estate of the deceased, thereby not increasing or creating an IHT liability. In certain cases a short-term, immediate solution could be the implementation of a term assurance policy, which, as the name suggests, lasts for a certain period of time, typically seven years.

• Laura King is a solicitor within the private client & financial services department at HBJ Gateley.

If you have a question you need answered, write to Jeff Salway, Personal Finance Editor, The Scotsman, 108 Holyrood Road, Edinburgh EH8 8AS or email: [email protected]. The above is for general purposes only and is not tailored for individual use. It does not constitute legal, financial or investment advice on any particular matter and must not be treated as a substitute for specific advice. No action should be taken in reliance of the information given. The Scotsman Publications Ltd and HBJ Gateley accept no liability on the basis of this article.