Inheritance Tax Planning
Some potential solutions

 Potential IHT Solutions

The following are some of the more common strategies for legitimately reducing an inheritance tax liability.  The list is not exclusive and is in no particular order as there is no perfect strategy.  Remember that all IHT mitigation strategies have potential "downsides" - costs or restrictions which may impact you significantly.  A financial adviser can attempt to identify a strategy or combination of strategies to allow you to meet your estate planning goals while also meeting your own financial needs for the present and future.  If such a solution cannot be found, a financial adviser can help you prioritise and decide whether inheritance tax planning would be suitable for you.

1.    Making gifts

We all have certain periodic and special gift allowances which are exempt from inheritance tax immediately - making use of these is often the first step of any inheritance planning strategy. Making gifts over and above these amounts may also be effective in reducing our inheritance tax liability provided;
  • that we survive for long enough afterwards (this is normally but NOT ALWAYS seven years) and;
  • that we make NO use of the gifted item/funds for ever after.  

For example if Fred signed over his house to his children but continued to live there, this would be very unlikely to reduce his inheritance tax, as essentially the house would be considered as if it still belonged to Fred for inheritance tax purposes.

It's important to note that if we die too soon for the gift to be considered exempt from inheritance tax, the amount gifted will still cause an inheritance tax bill on our estate or, in certain circumstances, on the person we gave the gift to.  A financial adviser can identify such circumstances and recommend appropriate insurance for the term to cover the tax bill if it arises.

2.     Creating trusts for our beneficiaries

Putting money or assets into trust for our beneficiaries can reduce an IHT liability in a similar way to making gifts, but creating a trust for our beneficiaries can have significant advantages over giving them the gift directly.  For example;

  • Some trusts may allow us to receive an income from our gifted funds during our lifetime, then pass to our beneficiaries without inheritance tax when we die.  This can be very useful if a client has an inheritance tax problem but also needs an income from his investment assets.
  • Some trusts may allow us to specify how and when the trustees may release the funds or assets to the beneficiaries.  We can make a "letter of wishes" to our nominated trustees which tells them what we wish to happen, and we can change this later on if required.  For example we could specify that the trust money may only be used as a deposit for a first home, for educational costs or for medical treatments. 
  • Some trusts can pass down generations from children to grandchildren to great grandchildren without suffering more inheritance tax each time the trust "leap-frogs" a generation.  This can be useful if we want our children to have the option of using the money but we think they might not need it when the time comes.
  • Some trusts may allow us to specify a "class" of beneficiaries - for example we could make all of our future descendants beneficiaries, even those who haven't been born yet.
  • Trusts may protect our estate should our beneficiaries go bankrupt or get divorced.

As with a gift directly to an individual, a gift into a trust is only successful for inheritance tax purposes if we survive for long enough after making it.  If we don't, there can still be a tax bill.  Also the tax and general legislation surrounding trusts can be complex, so we'd strongly recommend taking professional financial advice before taking any action.

3.     Taking a life assurance policy to pay the tax liability

A whole of life policy may be taken to fund the tax liability on death.  This is normally only an option where there is an excess of income available to fund such a policy - depending on the age and health of the life assured, the premiums can be expensive.

Also if we have made gifts or trusts for our beneficiaries as above then we may be able to take insurance for the seven years (or sometimes more) until the gift "drops off the radar".
This can be;

  • To cover the IHT due on the estate due to the amount of the nil rate band "used" by the gift or;
  • To cover the tax which will fall due on the beneficiary who received the gift.

4.     Spend it!

This is of course a very personal choice, but it is essential for a financial adviser to assess what proportion of our funds are likely to be spent in the future when calculating our likely inheritance tax liability.

If after assessing our situation it is expected that we will have an inheritance tax liability, we could consider using our funds to enjoy time with the family now, while we can. This would normally reduce our exposed estate by the amount we spend - provided of course the expenditure doesn't add value to our estate.  For example money spent on a cruise will be gone once spent, whereas money spent on home improvements might increase the value of the home and therefore remain within the estate.

5.     Making bequests to registered charity(s)

If we wish to leave money to charity the good news is that tax reliefs are available which can be used to effectively reduce our estate for inheritance tax.  Depending on the amounts in question and our specific circumstances it may be better to make these gifts during our lifetime using Gift Aid, or it may be better to leave them as bequests in our will.

Next Steps

If you'd like to discuss your estate preservation options, do feel free to contact us.

Telephone:   02920 009 479

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