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Inheritance Tax. It’s the tax that everyone loves to hate, and often with good reason. Without proper planning, Inheritance Tax can cost your loved ones hundreds of thousands of pounds in the event of your death – not a cheery thought. But with expert advice and careful financial planning, it’s possible to mitigate most (or even all) of it, effectively and without a huge burden of effort.

Welcome to our four-part series on Inheritance Tax planning. It’s a guide to how you can, with effective planning, mitigate the effect it has on your estate – as an individual, as a family or as a business owner (or a combination of the three). Our clients consistently tell us that Inheritance Tax is one of the primary issues they face, and our unique structure allows us to provide expert financial and legal advice that delivers solutions to their issues across the board. The aim of this series is to condense the key points of our advice into four blog posts which we hope will help you plan for your own circumstances.

Inheritance Tax can impact on a number of overlapping areas of our lives, and each part of this series will look at a different aspect. We will cover wealth and financial planning, asset management, and the legal concerns for individuals, families and businesses. When planning for Inheritance Tax it is important to address a combination or sometimes all of these areas to fully prepare your affairs.

We begin the series by looking at the wealth and financial planning implications of Inheritance Tax and consider how you can structure and organise your wealth to lessen the impact of the ‘death tax’.

The Options for Mitigating Inheritance Tax

What opportunities are there to reduce the value of an estate for Inheritance Tax purposes? There are a number of options to bear in mind…

Gifting Outright

A common option is to gift money outright to other family members or loved ones. This allows you to reduce your Inheritance Tax liability while helping out other generations of the family who are at a different stage in their life and who would benefit from the money. A contribution towards a house purchase or deposit is an example of this. The donor gets the pleasure of seeing the recipient enjoying the gift while they are still alive, while the beneficiary gets a welcome foot on the property ladder.

However, donors need to remember that all gifts remain liable for Inheritance Tax for seven years after the date of the gifting. It’s equally important that they have done their own calculations to ensure that they won’t need these sums themselves over the rest of their lives. We use Lifetime Cashflow Modelling which helps them with this. It looks at their assets, their income, their spending and what they are going to need both now and in the future. We assume a lifespan of 95-100 years old to make sure they will have everything they need. Once we have established this, we can see what assets they may be able to afford to give away.

Some people might be uncomfortable with gifting large sums of money to younger relatives before they are mature enough to spend it wisely. Later on in this series, we’ll be looking at how it’s possible to keep some control over the funds by gifting through a trust.

Annual Gift Exemption

The Annual Gift Exemption allows anyone to gift £3000 per year to a beneficiary without tax implications. It’s also possible to carry any unused annual exemption forward to the next year – but only for one year.

There are a few additional exemptions for things like wedding gifts and payments to help with an elderly person’s living costs – see the Government’s advice here.

Normal Expenditure out of Income

Another way of giving money away is through a gift which forms part of your normal expenditure. If someone has a large amount of surplus income – for example a significant level of pension income that they don’t spend – they could decide to gift an amount to a family member, tax-free.

The criteria for this are that it has to be provable that this is surplus to their own requirements and that donating it won’t impinge on their normal lifestyle. It cannot be a gift of capital, just surplus income. Although ‘normal’ does not necessarily mean regular or annual, gifts made on a regular basis are more likely to meet the normality test.

As a claim for this exemption is assessed by the executors on death, it’s important to keep an up-to-date record of income, surplus income, expenditure, how much was gifted and how often.

Insuring the Liability

In addition to gifting, there are further ways to offset the impact of Inheritance Tax on your estate. Using life insurance to insure your liability is one of them.

For example, if you know your Inheritance Tax liability is £200,000, you can take out life insurance to cover that amount. On death, that lump sum is paid out to the beneficiaries – usually the children, or whoever the estate is left to – and this is used to effectively pay the tax bill. Usually the policy is placed under trust so that the proceeds don’t go back into the estate and become liable to Inheritance Tax again. However, insurance can be a costly option as people get older, and health issues can also bring difficulties in securing life insurance cover.

Pensions

There are a many different ways that people invest and structure their money. In recent years, pensions have become a very Inheritance Tax-friendly vehicle for savings. If there is a pension pot left when someone dies, this can be passed to a nominated individual without Inheritance Tax being due.

While, for example, ISAs are good for building up pots of tax-free money when people are in the wealth accumulation stage of their lives, when it comes to the end of their lives, for Inheritance Tax purposes, ISAs will remain a part of their estate. So, for longer-term planning, if an individual has a number of different pots to draw on during their retirement they should use things like ISAs first and draw on their pensions last due to these tax-efficient benefits.

Our financial planning process takes all of these factors and opportunities into account, helping clients to build a robust and effective financial plan that puts measures in place to mitigate the effect of Inheritance Tax on their estate. It also covers equally important areas such as investments, contingencies, life events and lifestyle planning. Progeny’s unique framework, which provides integrated financial, legal and asset management solutions, allows us to look at our clients’ affairs from a holistic point of view and put solutions in place that take care of every aspect of their estate planning, from their personal financial and legal needs to those of their families and businesses.

If you would like some help or advice with Inheritance Tax planning, please get in touch. We’d love to hear from you.

In part two of Progeny’s Guide to Inheritance Tax Planning, we look at the tax from a personal legal perspective, including how trusts and family investment companies can be used to mitigate its impact on your estate. Click here to continue reading!

This article does not constitute financial advice. Individuals must not rely on this information to make a financial decision regarding investments or Inheritance tax planning. Before making any decision, we recommend you consult your financial planner to take into account your particular investment objectives, financial situation and individual needs.

Photo of Sarah Giles

Author Sarah Giles

Paraplanning Team Leader, Progeny Wealth

Sarah joined Progeny in July 2018 as a Senior Paraplanner and was promoted to Paraplanning Team Leader in December of the same year.

Learn more about Sarah Giles

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