You can’t take your wealth with you

While it might be unpleasant for some to think about death, for others the primary focus of accumulating wealth is that it might benefit their offspring and future generations, so making arrangements for the distribution of one’s assets is dealt with early on. It is important to consider these arrangements whether you are an international entrepreneur with businesses and interests in many countries, and assets in several different forms, or whether you are an average wage-earning individual, as you will still have to consider arrangements for your pension plan, life insurance, home and savings.

Many countries levy what is known as a ‘death tax’. The first ever formal inheritance tax was implemented by Julius Caesar in the 1st century BC. In the UK, ‘death taxes’ were not introduced until 1796 when they were brought in to finance the Napoleonic Wars. This wartime tax persisted in peacetime, and some form of taxation on estates has remained ever since. Throughout the 19th and early 20th century, British citizens were expected to pay ‘Succession Duty’ (between 1 and 10 per cent of anything inherited, with waivers for small individual inheritances or low value estates — in 1889, for example, the tax threshold on an estate was raised to £300 (Dh1,722). In 1975 the Capital Transfer Duty was introduced and all major gifts throughout a person’s life were liable for tax. Inheritance tax as we know it, was introduced by Margaret Thatcher’s government in 1986.

In terms of the UK law, specific taxes are applied to an individual’s estate when they pass away. When you die, all estates with a net worth of less than £325,000 are currently free of inheritance tax (IHT). For every £1 above this threshold, 40 per cent disappears when you do. With the rise in property prices, it’s not just the super rich who need to plan how to pass on their wealth.

The Seven Year Itch: People have a vague idea that that they can give their money or assets away before they die, and avoid inheritance tax that way. It works between marital and civil partners for any sum of money, but a quick look at the figures for other recipients shows that planning sever years ahead is crucial.

If you want to give some of your money away within the seven years before you die, you are limited to gifts worth just £3,000 per annum. However, gifts out of surplus income are exempt. Remember, taper relief only applies to gifts made in excess of the nil rate band. So you can see that even for people of middling wealth, inheritance tax and estate planning is essential.

Death, where is thy sting? With the help of an expert in tax and estate planning it’s relatively easy to manage your IHT liability. In spite of all the scare stories, 94 per cent of all estates in the UK do not pay inheritance tax.

Here are five ways of passing your wealth on more tax efficiently:

1. Make a will that takes all potential IHT savings into account.

2. Use lifetime gifts to transfer your assets more tax-efficiently.

3. Invest in a fund which offers IHT exemption after two years, such as forestry, some AIM shares or trading companies.

4. Set up a trust or a charitable foundation to administer your assets.

5. Protect and insure your wealth by setting up a managed company, with IHT efficient investments and substantial life insurance.

The average time for your wealth to be passed on through probate is between six months and three years. So, if you’re in line for a legacy, don’t base your retirement plans on the expectation of a swift inheritance.

The writer is senior financial consultant at Acuma Wealth Management in Dubai.