Although it is often perceived that IHT planning involves the sacrifice of lifetime benefit (i.e. you have to give everything away to reduce your future estate value and estate IHT liability) this is exactly that: a perception.
Essentially, for the majority of people there are a handful of approaches that can be taken to mitigate a future IHT liability:
- Ignore it – allowing the “what will be, will be” approach to win the day. If there is tax to pay later on so be it.
- Spend enough money so that nothing is left; which may be more difficult said than done!
- Wanting to do something but feeling like it is too tough a task or requires too much sacrifice or cost.
- Wanting to do something and creating a structured plan and approach to tackling the ‘problem’.
There are many ways IHT can be reduced, offset or eradicated altogether and many of these do not have to involve a reduction in a lifetime benefit.
However, having made the statement above, the flip side is that there are many people who can reduce their estate by distributing their assets in their lifetime and who can afford to do so.
It is a case of determining what can be done and how much any particular approach will cost (where the cost may be measured in other ways above and beyond a monetary cost).
The solutions available are likely therefore to represent different opportunities or attractions to different people, depending on their circumstances.
We present below a series of possible methods of tackling the IHT liability. In every case, we present a top-level explanation, which is not meant to act as anything other than an indication of what may be achievable – nothing here is intended to represent a detailed analysis, which can only come from individual consultation and advice.
It is likely in any IHT planning situation that a combination of the individual solutions will be used to create an overall plan to reduce or totally mitigate an IHT liability.*
Gifting and IHT Planning
Naturally, the most effective solution is to ensure that your estate value on death is equal to or less than the value of your Nil Rate Band. In this respect distributing wealth prior to death is highly effective but does have some drawbacks. Find out more here.
The ‘7 Year Rule’ and IHT Planning
Gifts you make to individuals will be exempt from Inheritance Tax as long as you live for 7 years after making the gift. Gifting is very effective but comes with some risks and potential complications.
Trusts and IHT Planning
It is odd that many have a perception of trusts as complicated, costly and cumbersome; only for the rich. None of these is accurate descriptions of trusts.
Using Exemptions
There are various ways of gifting money without any recourse to a 7-year rule, these include gifts to charities.
Business Relief
Another exemption can be achieved via Business Relief (BR). BR is available for qualifying investments and assets and includes a reasonable list of suitable holdings, for example, shareholdings in smaller companies listed on the AIM stock market, shares in a privately-owned business and holdings in agriculture.
Life Assurance Solutions
Amongst all possible options, the life assurance solution is the one that often receives the least attention, because it is often assumed that it is expensive or prohibitive. Ironically this is not the case at all. For a couple in their 60s or even 70s, for example, the cost of a joint life second death policy is remarkably low (in relative terms).
There are many possible ways of dealing with Inheritance Tax – and avoiding it. What is important is that you seek advice on your options.
* It’s important to consider Inheritance Tax implications when making your Will. If you would like advice on Inheritance Tax planning, we partner with specialists who work with you on your individual circumstances to help you and your family plan for Inheritance Tax. We do not provide this advice at first hand but work closely with our partners.
The information in this blog contains details of tax rates, allowances and exemptions relating to Inheritance Tax Legislation, plus ideas about these may be managed or mitigated. All information and ideas presented are subject to the prevailing tax rules and will be dictated by personal circumstances. You should only use this blog as indicative of what may be the case or what you may be able to do. No action should be taken as a result of anything within this blog or the guide, you should always take appropriate regulated advice before proceeding to act in any way to deal with any possible IHT liability or requirement you have.
