Inheritance Tax Planning

Often clients' estates will be subject to this tax and clients will not be aware of this. Families are caught unawares! Many houses are now worth more than the minimum level at which inheritance tax is charged. Planning now can minimise, if not remove this tax demand entirely.

This can be a complex subject and the effects of not planning can be significant for your surviving family. In addition, we can offer help to the executors of an estate with their application, policy valuation and understanding of assets, investments and life assurance policies (if applicable). Our executor services and your requirements can be considered further by telephone or email.

Wills

We would always recommend that a client has made a Will. A Will is one of the cornerstones of financial planning and Inheritance Tax planning. Each individual has a standard nil rate IHT band of £325,000. Spouses can pass this to the surviving spouse/civil partner on death, affording a joint estate protection normally to £650,000. Thereafter, inheritance tax is usually charged at 40% on any balance above this level.

New probate fees became applicable to estates from April 2019. More can be found at our blog here: New Probate Fees

Power of Attorney (Health and Wealth)

I am sure that your solicitor or legal adviser will have recommended that you make a Will. If you are updating your Will, take some advice at the same time on establishing Power of Attorney arrangements. There are two types – health and wealth – and it may be sensible to establish these in your circumstances.

We have detailed below a table of the exemptions/ allowances available, based on current legislation (which can change):

Main exemptions for tax year 2024/2025

The level of the standard nil rate inheritance tax band is planned to remain fixed at £325,000 until 2026.

It is simple to take inexpensive steps to solve this problem or to go a long way to alleviating the inheritance tax liability. This is where bespoke planning, usually using a combination of exemptions and allowances, allows us to provide you with recommendations for you and your family to consider. We would need to take account of the gifts and allowances that you have used in the past, such as Potentially Exempt Transfers (PETs).

The 'residence nil rate band' for inheritance tax purposes

Inheritance tax is always a topical and emotive subject and one that focuses the minds of those affected.

We have detailed above some of the allowances available to help with financial planning and the potential reduction of any tax liability due.

The change in inheritance tax calculation terms for the main residence (from 06 April 2017) has been welcomed by many as some respite against what has been described as a voluntary tax. However, it may not be as straightforward as first appears (when are tax affairs straightforward!) and it may be sensible to review your Will arrangements with a legal adviser, particularly if they are old. We would advocate a regular review of a Will document anyway to reflect clients' changing circumstances, possibly adding in Power of Attorney arrangements in a timely manner where likely to be needed.

We are not legal advisers, but do have various excellent local legal contacts for the review process, and have asked one of these for an update on this new change. They note in their factsheet text:

Married couples whose joint estates are worth from £650,000 to £2.0m should normally qualify for the full Residence Nil Rate Band. However, their Wills may need to be reviewed to ensure that, for example, any trust interests for children or grandchildren arising under their Wills satisfy the fairly complex requirements for the Residence Nil Rate Band to apply.

If the joint estate of a married couple is likely to exceed £2.0m, the Residence Nil Rate Band will normally be tapered. Such individuals might wish to seek advice on passing assets to their children during their lifetimes or on the first death so as to bring their estates below the level at which tapering applies.

(Source: Charles Russell Speechlys LLP )

We would be pleased to provide you with a copy of their three-page factsheet on request, if this is of interest, and to provide a referral if required. No individual legal or financial advice is provided in this note.

If you would like us to work with your legal adviser to control your liability then this can be easily arranged.

Points to consider

Think about leaving a charitable legacy

Gifts to charities are not subject to IHT and if you make significant gifts to charities from your estate, the inheritance tax charge can fall. Your estate may qualify to pay inheritance tax at a reduced rate of 36% (rather than 40%) if you leave at least 10% of your net estate to charity. HMRC has developed a helpful calculator which is useful in working out the amount needed to qualify: https://www.gov.uk/inheritance-tax-reduced-rate-calculator

Consider gifting in lifetime

There are a range of ways in which gifts can be made to reduce an estate's liability to IHT. Gifting needs to be planned carefully to ensure that conflicts do not arise between the desire to reduce tax after death and the need for funds during life (e.g. for long-term care needs). Some points to consider:

• Annual Gift Allowance: £3,000 per donor per annum. If you did not use last year's allowance, you can go back one year to gift £6,000. Therefore, a couple could as an example give away £12,000. We think it is sensible to document this gifting in letter format to provide a suitable audit trail.
• Gifts from surplus income: if after applicable tax, you have surplus income over and above what is needed to maintain your standard of living, this can be given away and should usually fall outside the estate immediately. This income can be gifted either directly to the recipient or into a trust and you might wish to establish a family trust to achieve this. The calculation to ensure that any surplus remains such should be documented each year. Care and planning is required here because some 'income', such as 5.0% gross pa withdrawals from investment bonds, are treated as return of capital and are not income for this purpose.
• Potentially Exempt Transfers (PETs): If you want to make lump sum gifts away from your estate, either to a recipient or to a trust, you can do this (although the gift only falls fully outside your estate after seven years). There are beneficial tapering factors applicable from HMRC and these can be found here: https://www.gov.uk/inheritance-tax/gifts.
  Any gift (PET) made above the nil rate band of £325,000 can still be made, but it should be noted that any inheritance tax charge that may become due would fall on the recipient, rather than the estate.
• Establishing Trusts: For some, the thought of giving away funds directly to relatives does not appeal. This may be because the beneficiary is too young, even unborn (e.g. future grandchildren), or that they may not use the money as you would intend. This might be a good reason to use a Trust, and your legal advisers can help establish an appropriate arrangement. Suitable gifts can be made to a Trust, usually with the Trustees deciding how future funds are distributed across a group of beneficiaries (named or as a class, such as grandchildren). This can offer a solution to gifting now, whilst maintaining control over the funds in the future.

Nominate your pension funds

You may well have built up a range of pension plans over the years and it's important to keep the nomination of death benefits up to date on all of these, in line with your life changes.

For money purchase pension plans, the value of your pension plan usually remains outside your estate for IHT purposes and accessible to your beneficiaries without recourse to probate, which can be a helpful source of funds at a difficult time. The fund value can pass tax-free to your chosen beneficiary/beneficiaries on your death before your age of 75. After this time, the fund can pass to your beneficiaries and will be taxed at their marginal rate of income tax.

It is important to note that if a death occurs within two years of a change in nomination, HMRC may want to check that this change was not achieved with the aim of reducing any tax position. As an additional point, and in the same way, HMRC may also investigate a pension transfer that took place within two years of death.

If you're fortunate enough to have final salary (defined benefit) pension benefits, either in payment or in deferral, these could provide for a spouse's pension on your death, and possibly even a pension for your children in some cases. If you're not married or in a civil partnership, it is important to check the scheme rules to see whether the scheme would pay a dependant's pension to your partner, as some schemes may not allow this.

Regular Review

Solutions to inheritance planning are numerous and invariably use annual allowances. Using a combination of the options noted above is not uncommon. It is important that any planning is reviewed regularly to ensure that it still meets its objectives, that annual gift allowances are used, and that if you are making substantial gifts during your lifetime, your needs are still protected.

Combination arrangements

Inheritance tax planning can be by its nature complicated, set against the desires of the individual to have enough money for their own needs for their futures, particularly if these change and costly expenditure, such as long term care, is required. This personal need can be challenged by their love of the family (and corresponding dislike of any Chancellor of the Exchequer) to give them as much as they can when they are gone.

Invariably, we find that it is a combination of planning, of gifting, of investing, over time to help reduce any future inheritance tax liability. There are many options, from investing in AIM (Alternative Investment Market) shares/ portfolio, possibly combined in new/existing ISA arrangements, to gifting as noted above, to insuring the liability, if suitable. We can help you consider all of these options.

Many exemptions, such as the gift from surplus income are overlooked but can be used to powerful effect. Exemptions are annual and if you don't use it you lose it! Some call inheritance tax an unnecessary tax, and we would agree.

Talk to us and see what planning can be used to save your family estate. There is no individual advice provided in the content of this webpage.

Please note that this is for guidance only and we recommend that you seek further advice from an Independent Financial Adviser before proceeding further. The Financial Conduct Authority does not regulate taxation and trust advice.