Inheritance Tax Planning

Protecting your wealth for future generations

What are the best ways to pass on my assets to those that matter the most?

Whilst there has been some relaxation in Inheritance Tax rules in recent years, many families are still unnecessarily caught by this tax. Even those who think they have fairly moderate wealth may still need to consider taking action, particularly if they own property and have savings.

We can calculate for you the impact that Inheritance Tax might have on your family’s assets in the event of your or your partner’s death and can advise you on any measures you could take to reduce your Inheritance Tax liability.

Estate Planning is not just about mitigating inheritance tax, it covers far more than that. It can be defined as:

Leaving your assets to those that matter to you in the most effective way.

Effective planning will take account of a broad range of factors which include:

• Maintaining suitable access to income and capital
• Tax efficiency
• Protection of the assets from divorce, bankruptcy and other threats
• Protection from irresponsible beneficiaries
• Providing for vulnerable or minor beneficiaries

Estate Planning is therefore important for everyone, and it is essential that you have a clear idea of what you are trying to achieve before you start.

Once you are ready to start looking at solutions it is important to systematically consider all the options that are available. It is highly unlikely that your estate planning objectives can be solved in a single action. The best solutions are likely to involve multiple steps which require a number of different professionals working together to help implement. It may involve reviewing your wills with a solicitor; taking advice on how to pass on your business from an accountant; cash flow forecasting; retirement planning advice and investment advice from your financial adviser.

If mitigating inheritance tax is an objective then the driving principle when planning will be to find the optimum balance between tax-saving on the one hand and access to the capital and income you will need on the other.

Although there are many potential solutions available they can be distilled down into three broad strategies, each of which can be further broken down:

1. Maintain the same sized estate but maximise the amount which is exempt or relievable on death.
2. Reduce the size of the estate by increased spending or gifting. Gifting can be outright to your loved ones, or involve the use of trusts, some of which can offer you the flexibility to make sure that have what you need first and foremost.
3. Pay the liability. For some people mitigating inheritance tax is not a priority and they are happy to leave their estate to pay any IHT liability and pass the remainder to their beneficiaries. However, often a more efficient way of paying the IHT liability is to pre-fund it using life cover.

Some of the actions we would consider in advising clients in this area are as follows:

Step 1 - Initial Actions and Legal Work

Put existing life cover in trust
Put lump sum death benefits from uncrystallised pensions into a trust
Divert recent inheritances using a deed of variation.
Consider creating lasting powers of attorney in case of incapacity.
Review the wills.

• Consider passing assets to the grandchildren rather than the children (maybe using a trust)
• Consider protecting the survivor’s position using life tenant trusts
• Consider charitable gifting
• Consider discretionary trusts for:
  • the nil rate band sum
  • assets qualifying for agricultural property relief or business property relief

Step 2 - Reducing the estate through gifting and spending

Before a client starts gifting, it is important that they consider how much they can gift without leaving themselves short in the future. When calculating this figure it is important to take account of the unexpected costs such as long term care. Before making significant gifts it is important that you have ensured your own future is secured.

Once we have worked with our client to decide how much they are able to gift without jeopardising their own future, they should first consider increased spending and exempt gifts as these will be immediately effective. If they have the capacity to gift in excess of the inheritance tax exempt amounts, they can then consider either making further outright gifts, or gifts into trusts.

Outright gifts have the benefit of being simple and cheap, but they give control of the money to the recipient, which may not be suitable if they are too young, not responsible enough, or likely to divorce, become bankrupt or other reasons.

Trusts can be more complex, but they can provide some control and protection of the assets gifted. In many cases the best solution may be a combination of different types of gifts, and the use of different types of trust.

Step 3 - Insuring the remaining liability

Once the previous steps have been taken (or considered inappropriate), any remaining liability can be covered using life cover.

Whole of Life assurance can be used to cover the liability that will exist once the gifting strategy has become fully effective (i.e. after 7 years).

Level Term policies can be used to cover the additional liability on the estate due to the reduction in the nil rate band caused by recent gifts.

Gift inter vivos policies can be used to cover the liability faced by the recipients of gifts exceeding the nil rate band.

Tax-Led solutions

Tax-led solutions such as Enterprise Investment Schemes and portfolios which qualify for Business Property Relief may be suitable in the following circumstances:

• Clients who will incur large CGT liabilities on encashing their existing investments.
• Elderly clients who may not live for 7 years but are likely to live for at least 2 years.
• Clients who have companies they intend to sell (or have sold within the last 3 years) who wish to preserve the BPR benefits of their assets.
• Clients who have maximised their CLT allowance and wish to put more money into discretionary trusts.

A client’s appetite for risk also needs to be carefully considered when recommending these solutions as they trade in unlisted companies and are therefore inherently higher risk. In the right circumstances however, tax-led solutions can provide IHT savings in 2 years rather than 7 years, and can defer the Capital gains tax (CGT) created by other recommendations, such as gifting.

This is a complex area and one in which mistakes can be made. Getting advice from a fee-based financial adviser can make all the difference. Our initial Consultations are of course, free of cost, which will at least assist you, in determining whether you have an issue or not.

If you would like to know more, please submit an enquiry via the form below or contact us.

Important Notice

The way in which tax charges (or tax relief, if appropriate) are applied depends on individual circumstances and may be subject to change.