At a glance
- Families paid £4.6 billion in Inheritance Tax (IHT) through the first seven months of the 2023/24 financial year (April to October) – up 12% on the first seven months of 2022.1
- Reducing the value of your estate during your lifetime will mean that your family will owe less IHT in the future.
- Many people know that they can gift money to reduce their IHT liability, but not everyone knows how workplace pensions and death-in-service benefits can be ringfenced to avoid IHT.
Inheritances can be life changing. An inherited lump sum can send children or grandchildren to great schools, or on great gap years. They can mean a mortgage paid off early, or a new business launched.
So, not surprisingly, leaving a good legacy is high on most people’s financial wish lists. And the less Inheritance Tax (IHT) your family will pay, the more you’ll pass to them.
How much IHT might my family pay?
Currently, IHT is usually charged at a rate of 40% on the portion of the estate over a £325,000 threshold, or up to £500,000 if it includes a family home worth at least £175,000 which is passed on to children, grandchildren or another direct lineal descendant.
Most of us know that we can reduce the value of our estate by gifting money during our lifetime – it’s one of the most straightforward elements of inheritance planning.
Fewer people are aware that their death-in-service benefits or workplace pension lump sums can also help your family avoid a high IHT bill.
Let’s look at death-in-service benefits and workplace pension lump sums first.
Will my death-in-service benefit mean a higher IHT bill?
Knowing that, if the worst should happen, your named beneficiaries will receive a death-in-service benefit or a pension lump sum is a reassuring safety net. Better still, those sums of money are generally not counted as part of your estate – so you don’t pay IHT on them.
But while that sizeable amount of money won’t be considered part of your estate, it will eventually be counted as part of your beneficiary’s estate, when they die. At that point, IHT will be payable.
Although intended to help your family financially after your death, a lump sum payment from a death-in-service benefit or a workplace pension pay out, can actually be a mixed blessing.
Can I protect my death-in-service or pension lump sum from IHT in the long term?
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 (£325,000) threshold. Suddenly, there’s an IHT liability where none existed before.
There is a way to protect this money for your family for all generations, however – by setting up a Legacy Preservation Trust (LPT).
How a Legacy Preservation trust can help you avoid IHT
Trusts can play an important role in legacy planning. And a Legacy Preservation Trust or LPT, does exactly what it says on the tin – preserves your legacy for the longer-term, so money can pass tax-efficiently through several generations of your family.
A SJP Legacy Preservation Trust is designed to hold assets such as death-in-service and pension death benefits so that your beneficiaries can access the money if they need to. But the money itself sits outside your estate, protected from IHT. If or when the beneficiaries draw on the money, there may be various tax liabilities to consider.
Trusts and legacy planning can seem complex – and of course, you want to be certain you’re doing the right thing for your family, since you won’t be around to put things right. We recommend that you always take financial advice when you’re starting to think about inheritance and legacy planning, especially if you think you might want to set up a Trust.
How do I set up a Legacy Preservation Trust?
We can explain LPTs and help you decide if one is the best choice for you and your family. They’re easier to set up than you may think. You need to choose two trustees who will be responsible for the distribution of your money after you have died. You also need to inform your employer of your arrangements with an ‘expression of wishes’ form from your pension provider –your HR department should be able to help you with this.
This ensures that the money is paid into the LPT, rather than to an individual beneficiary, when the time comes.
How a Legacy Preservation Trust gives you control of your estate
LPTs aren’t just for the very wealthy. They’re equally useful for anyone likely to have a medium-sized estate too. Placing your money in an LPT will help guarantee the financial wellbeing of not just one generation, but several.
An LPT gives your trustees more control over how and when the money is distributed, and to whom, so it can have other side benefits that can help solve other issues too.
For example, if you have children from a previous relationship or marriage, you may worry about what happens to your wealth if one of your beneficiaries splits up from their partner. Or you might have some concerns about someone’s ability to manage their finances.
Together with your ‘expression of wishes’ letter, an LPT can help prevent money ‘drifting’ into other families, or not being spent as you’d hoped.
Your letter of wishes controls your legacy
With an LPT, the distribution of the money is controlled by your chosen trustees. They can make decisions based on the instructions you leave behind in a letter of wishes – it is vital therefore to choose the right people to act as your trustees. That letter can be used by your trustees to decide what should happen when you’re no longer around.
We recommend that you review your letter of wishes whenever there’s a big family event and update it if necessary. Any time there’s a change within the family such as marriage, divorce, or new grandchildren, it’s a good opportunity to revise the letter, and make sure that your wishes are clearly set out to help your trustees make the right decisions.
Setting up a St. James’s Place LPT
LPTs are an exclusive SJP product. Any of our Partners will be happy to help you through the setting up process or explain it in more detail.
As a form of discretionary trust, an LTP may be subject to certain tax charges – but these can often be offset by the benefits.
We can also advise you if the trust becomes unnecessary – for example, when you have retired and death-in-service benefits are no longer relevant, or if your tax position changes.
If you’d like more information on planning inheritance tax, or if you want to see how a St. James’s Place LPT can save your family tax just get in touch.
The Legacy Preservation Trust is an advised SJP product, available through a St. James’s Place Partner.
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:
1HRMC, 21 November 2023
SJP Approved 11/04/2024