Take care of your family: Mitigate your Inheritance Tax liability with a legacy preservation trust

Overview:

• Bereaved families paid £6.1 billion in inheritance tax in the last tax year (2022–23), the greatest annual increase since 2015–16.¹
• Your family will have to pay less IHT in the future if you reduce the value of your estate during your lifetime.
• Gifting money is a popular way people reduce their estate, but other options can include workplace pensions and death-in-service benefits too.

Many people know that gifting money to their loved ones throughout your lifetime can significantly reduce the size of their estate.

What a lot of people don’t know is that workplace pensions and death-in-service benefits can also be shielded from Inheritance Tax (IHT).

Will my IHT bill be higher if I get a death-in-service benefit?

Your death-in-service benefit provides a lump sum payment to a designated beneficiary in the event that you pass away while still employed by your company. That lump sum is then absorbed by your beneficiary’s estate and the value is assessed to IHT when they die.

However, a lump sum payment from a workplace pension or a death-in-service benefit can actually be a mixed blessing, even if it’s meant to support your family financially after your passing.

Your family may be required to pay a larger IHT sum, the more your estate is worth. And nobody likes to see HMRC receive more of their money than necessary.

The same holds true if your beneficiary would receive a lump sum payment from your workplace pension when you die.

Preventing my death-in-service or pension lump sum from an IHT bill

IHT is currently charged at a rate of 40% on the part of an estate that exceeds £325,000, or up to £500,000 if it contains a family residence that is being passed down to children, grandchildren or another direct lineal descendant. Transfers between spouses and civil partners are free from IHT, however.

Claire Trott, Divisional Director – Retirement and Holistic Planning at St. James’s Place, explains:

“Death-in-service benefits are often multiples of salary, so even if people don’t currently have any issues with IHT, a payment from one of these schemes can push their estate over the nil rate band i.e. the £325,000 threshold, and suddenly they have a much larger IHT bill to pay.”

Getting help from a legacy preservation trust from SJP

In legacy planning, trusts can prove quite useful. And a St. James’s Place legacy preservation trust (LPT) does exactly what it says on the tin – it protects your legacy so that more money may be left to the people you care about.

Assets like death-in-service and pension death benefits can be held in a St. James’s Place LPT so that your beneficiaries can access the funds if necessary. But the money itself is kept separate from your estate and is exempt from all taxes, including IHT.

Setting up a legacy preservation trust

Putting yourself in control of your estate

LPTs are available to people of all income levels. In addition to lowering your IHT tax, they offer other helpful advantages that could help with other financial planning.

For instance, if you have children from an earlier marriage or relationship, you might be concerned about what would happen to your wealth if one of your beneficiaries split up from their partner. Or maybe you’re even worried about how well they can handle their money. You have more control over when, how and to whom your money is given with a St. James’s Place LPT. “Money can otherwise quickly drift into other families,” Claire explains.

Funding later like care with money in an LPT

Money invested in an LPT isn’t part of your estate or the estate of your beneficiary. As your beneficiary gets older, it won’t be relevant to their eligibility for local authority social care, which is means-tested.

In an LPT, the trustees you select determine how the trust’s assets are distributed. The guidelines you leave behind guide their decisions. It’s crucial that you leave trustees a letter of wishes that you update regularly. Knowing that your wishes will be honoured when you pass away can help offer you more peace of mind.

We advise you to go through your letter of wishes whenever an important family event happens. Claire advises:

“Think about it every time there is a change within the family such as marriage, divorce or new grandchildren. This is a good opportunity to consider who you want to benefit.”

Setting up a St. James’s Place LPT

We can be there to help you every step of the way. Because an LTP is a type of discretionary trust, it could incur certain tax charges. But these are often balanced by the advantages.

We can also offer advice if the trust is no longer necessary, such as if you retire and the death-in-service benefits are no longer relevant or if your tax position changes.

Clients may believe the admin work required to establish a trust is a bother, according to Claire. However, ultimately, the positives outweigh any negatives:

“I like to think of it as a back-up plan. Often you don’t appreciate why you need one until the time comes. It can be very good in complex family situations because it allows a third party trustee – whom you trust – to make the right decisions on your behalf.”

For more info

Get in touch with us if you’d like more details on inheritance tax planning, or if you want to learn how a St. James’s Place legacy preservation trust can reduce your family tax and help you manage your money.

The Legacy Preservation Trust is an advised SJP product.

The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.

Trusts are not regulated by the Financial Conduct Authority.

Source: 

¹ Inheritance Tax statistics: commentary – GOV.UK (www.gov.uk), accessed 28 June 2023