One aspect of financial planning that has become increasingly prevalent is Inheritance Tax (IHT). Hints that this was to be abolished in the Spring Budget have not materialised.
Perhaps the Chancellor realised he couldn’t do without the estimated £7.8bn it will raise this tax year, a sum which has tripled since 2009, when the Inheritance Tax Nil Rate Band (NRB), which determines the tax-free amount a person can leave behind, was frozen at £325,000. This allowance has not kept up with growing asset values, resulting in more estates being subject to tax at 40% above this figure.
At Wise Investment, we believe in simplifying our clients’ complex financial landscapes. In this article, we briefly examine the intricate topic of IHT and provide guidance on how to “Keep it in the family.”
What Can I Leave to My Family Free of IHT?
When a spouse leaves their entire estate to their other half, the Inheritance Tax (IHT) is usually postponed. This allows the unused NRB to be carried forward, effectively doubling the tax-free inheritance after the second of the couple passes away. This also applies to the Residence Nil Rate Band (RNRB) of £175,000 per person for homeowners who wish to pass on the family home to their children or other direct descendants.
For married couples who jointly own the family home and plan to leave it to their children, this means the total IHT exemption is £1 million. It’s important to note that these provisions do not offer much relief for unmarried couples, individuals without direct heirs, or estates worth over £2 million. If an estate exceeds this threshold, the RNRB gradually reduces and is completely removed at £2.35 million.
Possible Solutions
There are various ways you can look to mitigate the IHT liability on your estate:
- Spend it. Perhaps the simplest way to reduce the value of your estate and potential IHT bill is to enjoy the money. Why not go ‘Skiing’ – Spending Kids Inheritance? Spend money on activities which immediately lose their monetary value such as eating out, entertainment and holidays. These activities all obviously have value beyond pounds and pence. Avoid buying potentially appreciating assets such as property, antiques and collectables, as this just shifts the value and could even make the problem worse.
- Gift it. Making direct gifts to your chosen beneficiaries can be a satisfying way of reducing any future liability. Consider the ‘7-year rule’ where gifts made more than 7 years before death are free from IHT. Do not overlook the ability to make gifts made from excess income, which should immediately fall outside of your estate. Such gifts need not be outright but could be paid into a Trust. This would mean you can start to take value out of your estate but still have control over when the beneficiaries receive funds. A halfway house is a Loan Trust where the original sum always forms part of your estate, and you can call upon it if you need it. However, any growth in the underlying investment is immediately outside of the estate and retained for the beneficiaries.
- Shelter it. Any funds held in Pensions will not form part of your estate and so should be preserved and grown where possible. Of course, if you ever need the money yourself, it is there waiting for you. Explore investments which attract IHT Business Relief (BR). Normally, these would fall outside of your estate after you have held them for just 2 years, but you also retain ownership and control. For example, a portfolio of Alternative Investment Market (AIM) shares or specialist structures operating in renewable energy or secured property development lending, amongst others.
- Insure it. A Whole of Life insurance policy which would pay a lump sum out into a Trust which can then be used to pay the IHT bill. You should consider the cost of the premiums which can be very expensive, particularly as you get older or if you suffer health issues. If you are unable or unwilling to maintain the premiums, the policy ceases, and you lose the cover.
Avoid overplanning! Strike a balance between providing for your own needs, assisting your beneficiaries, and minimising tax. Life brings change – income varies, investments fluctuate, and unforeseen expenses arise.
Importance of Planning
You may well be asking, “How much of a problem is this for me?”. No doubt you will have a general idea as to whether or not your estate is going to suffer IHT, but do you know the exact bill today should anything happen to you? Do you know what it might look like in the future if you do nothing? As you might expect, the way in which the IHT rules work and interrelate is complex. Each individual’s estate and viewpoint will be different, so there is no ‘one size fits all’ approach.
This is where Wise Investment comes in. After assessing your estate’s value, existing plans, and future goals, our Financial Planners provide a comprehensive report. This equips you to tackle the issue if your estate exceeds the threshold. We’ll continuously review your plan to minimise IHT while preserving your broader financial objectives.
Joseph Cooper FPFS – Chartered Financial Planner
Phone: 01608 695100
Email: Wise@wiseinvestment.co.uk
Website: wiseinvestment.co.uk
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This article is intended for information only and does not constitute advice. All information is based on our understanding of current law and practice, which may be subject to change in the future. Past performance is not an indication of future performance.
Any investments you make and any income, can go down as well as up – you might not get back the full amount invested. Wise Investments Limited is authorised and regulated by the Financial Conduct Authority, FCA no. 230553.
