The Trouble with IHT Planning

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Inheritance Tax planning is a thorny issue. With an ageing population along with rising house prices and consequent value of estates, trying to avoid a large Inheritance Tax liability is something that an increasing number of people are having to consider.

The current state of affairs

According to the latest figures, Her Majesty’s Revenue and Customs (HMRC) collected £4.7 billion in inheritance tax in the last financial year, a record sum since the introduction of the current system.

Whilst there are no planned increases to the main threshold for Inheritance Tax, as described in more detail here, an additional allowance known as the Residence Nil Rate Band (RNRB) was introduced in April 2017.

Outside of this, there are many estates that will have a surplus value in excess of the tax free bracket, with 40% tax payable on all funds over the applicable threshold on death.

Although many of us know the basic facts surrounding Inheritance Tax, as IFA’s, we find that there is often quite a gap between clients knowing about the rules and actually taking any action on them. This is usually down to one of two reasons – because there will almost certainly be a payoff; or because we don’t like to think about the inevitable – death!

Avoiding IHT vs. maintaining control

Due to Inheritance Tax rules, which require a seven year period between most gifts being made before it becomes free of tax liability, it is essential to leave enough time when Inheritance Tax planning. Although clients will generally want to avoid being liable for large sums of Inheritance Tax, we often find that when it comes to it, they are nervous about relinquishing control of their wealth. This may be for many reasons – perhaps they are unsure about letting go of their cash reserves, or else maybe they would sooner their children/grandchildren/relations make their own way rather than be handed an inheritance on a plate.

Whilst there are some Inheritance Tax strategies that can be implemented, such as the £3,000 ‘gift allowance’ per annum, these will not have a significant overall impact on larger estates.

Ignoring the ‘d’ word

As for avoiding thinking about death – there are few of us that like to embrace the thought of our own demise – especially if we still consider ourselves to be fit, healthy and active. However, making plans for the worst case scenario and actually putting them into action is the only sure-fire way of preserving the wealth you have put so much time and effort into building up. Simultaneously you can then rest assured that your loved ones will be sufficiently well placed financially in their own futures.

Are there any solutions?

If handing significant sums of wealth over into unchartered hands is a concern, it may be that there are other options rather than making outright gifts; such as utilising trusts with specified access dates and/or ages. Although technically still gifting this money to the beneficiaries, clients using this strategy can retain some control (but not benefit) over the assets.

Additionally, since the 55% death tax was scrapped as part of ‘pension freedom’ reforms, beneficiaries of inheritance via a pension stand to be much better off. Now, if a pension holder dies before the age of 75, they can pass their pension pot on without any tax implications.

If over the age of 75 upon death, withdrawals from the inherited pension are taxed at the recipient’s relevant income tax rate. These changes make pensions by far one of the most tax efficient ways to cascade wealth.

Ultimately, Inheritance Tax planning, as with any other form of financial planning, will involve making some serious decisions and being prepared to make certain sacrifices. Whilst it is likely that a compromise will have to be made somewhere along the line, Gresham’s role is to mitigate the impact this will have. For example, cash flow modelling can establish whether making lifetime gifts to loved ones is affordable and our up to date knowledge of financial products, along with allowances and legislation, goes a long way to helping you achieve your financial goals whilst retaining as much control as possible.

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