There is no doubt that talking about Inheritance Tax (IHT) invariably invokes an emotional response. It is a tax on the transfer of wealth to future generations.
When looking at IHT planning the starting point has to be an assessment of the likely IHT liability on death.
Without a crystal ball, an IHT calculation can usually only be a snapshot in time but having established the likely IHT liability on death, there are a variety of options and methods for IHT planning. Here are some of the key points to consider:
1. Make sure you write a Will (and keep it up to date!)
Making a Will makes your wishes about who you wish to benefit from your estate after you die known. Without a Will, your estate would be distributed according to the Laws of Intestacy, which may not be as you intended or even tax efficient. It is also important to choose who will administer and distribute the estate on your behalf.
Also consider a
Lasting Power of Attorney (LPA).
A LPA is a legal document by which an individual (the donor) gives another person or persons (the attorney) the power to act on his or her behalf during times of incapacity. There are two types of LPA, one for financial matters and another for health and care decisions.
2. Making Gifts
Arguably, the easiest way to start IHT planning is to make gifts. Gifts are generally outright and unconditional; which means you can’t have the money back or benefit from the gift if it is to be effective for IHT planning, however some types of trust allow you to retain access to either the capital or income generated.
Gifting up to £3,000 each tax year is exempt from IHT and any unused allowance from the previous tax year can be carried forward. This means married couples or civil partners can potentially gift up to £12,000 (£6,000 each) in the current tax year, assuming no gift was made in the previous tax year.
3. Life assurance
Outside of gifting, a bewildering array of products is available to help with IHT planning. Arguably the simplest is life assurance. In return for a regular premium, whole of life cover guarantees to pay a sum assured whenever you die. However, the key to effective planning is not the life assurance policy itself but ensuring that the policy is put in trust for your beneficiaries. Without the trust, proceeds on death will ordinarily form part of your estate and be subject to IHT, which defeats its very purpose!
4. Pension Planning
You may not be aware that most pensions offers a tax efficient opportunity to pass wealth on to future generations. It is worth checking the position with your pensions. Whilst IHT might not be due on your pension, depending on when death occurs, income tax might become payable on your beneficiaries. Reviewing your beneficiaries regularly therefore makes good sense. It might be the case that funding living expenses from other assets that are subject to IHT before drawing income from your pension makes sense. This is where financial advice can really add value.
You could also consider making pension contributions on behalf of others as a way of reducing the value of your estate subject to IHT.
5. Tax efficient investment
If you decide not to make outright gifts during your lifetime and/or where life assurance is not appropriate, investing tax efficiently allows you to keep control of your money whilst potentially achieving an IHT saving. Typically this is achieved by investing in assets that qualify for Business Relief which reduces the tax due on the asset when calculating how much IHT has to be paid. This investment strategy is generally perceived as higher risk
In conclusion IHT, in whatever form it takes, will continue to be an emotive issue. Talking about your objectives and tailoring a solution to meet your personal situation is more important than ever .
If you are considering how you can pass on wealth in the best way possible talk to our
wealth planning department today.
Roger Clark // Head of Wealth Management
