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9th June 2023
Latest news Tax planning

inheritance planning

Planning for inheritance tax (IHT) is key to protecting your legacy. How can you pass on as much hard-earned wealth as possible so your loved ones are taken care of when you’re gone?

Death might seem a long way off for you, or frankly something you just don’t want to think about. But while it’s easy to think about inheritance as relating to death, it’s also about living. Through careful planning, you not only improve your family’s livelihoods when you’re gone but also maximise your ability to sustain the retirement lifestyle you want to live while you are still here.

IHT is a tax on everything you own, also known as your ‘estate’ after you die. If the value of everything you own at the end of your life is over the IHT nil rate band, currently £325,000, and you’re not leaving it all to a spouse, civil partner, charity or community sports club, the net figure is subject to a 40% tax charge, suffered by your beneficiaries, and paid by the executors within six months of your death.

Your IHT threshold can climb considerably in certain scenarios. The addition of a ‘residence nil rate band’, which applies when you are leaving your home to a direct descendant, adds £175,000 to your nil rate bands. Meanwhile, if you are widowed and your deceased spouse didn’t use any of their IHT nil rate band, it will transfer to you, meaning yours could be up to £1 million. The residence nil rate band will, however, reduce by £1 for every £2 that your estate exceeds £2 million.

“Once your estate is approaching or over the IHT nil rate bands, there really should be proactive planning in place,” says Gill Philpott, Tax and Trust Specialist at Ascot Lloyd. “Start as early as possible so you can make the most of opportunities. Rules can change but planning with the rules we have now will mean opportunities will not be lost.

“Gifting can be especially useful if your estate is valued over £2 million and includes a residence that can benefit from the residence nil rate band, because at the £2 million point your residence nil rate band is withdrawn. But if for example your estate was £2.5 million and you gave away £500,000 today, you would immediately reclaim the residence nil rate band in full. There's no seven-year timeline on that. Yes, it uses your £325,000 nil rate band, but you get some really effective IHT benefits by recovering the residence nil rate band.”

Gifts made to anyone from an individual’s estate are exempt from inheritance tax provided they survive for a period of 7 years after the date the gift is made. These lifetime gifts are known as potentially exempt transfers (also known as PETs) and are not restricted in value.

Certain types of assets may qualify for IHT reliefs. While generally of a high risk in nature and, as such, only suitable for a limited market, these assets stay in your estate, remaining accessible, but may qualify for an IHT exemption after 2 years of the qualifying conditions being met.

Planning early

The nil rate band has been frozen at £325,000 for nearly 15 years, so don’t expect it to increase anytime soon. That means if you expect your estate to be worth more than that when you die, or more than £500,000 if you plan to leave your home to a direct descendant, (effectively £1 million for a married couple with children), you ought to be thinking about inheritance tax planning. The earlier that you can start that process, the better.

That’s because at the heart of IHT rules is the seven-year rule. Anything you own which is gifted to somebody else at least seven years before you die is exempt from inheritance tax. If you do die within seven years, there are other exemptions including an annual £3,000 gifting allowance which can be carried forward a year if unused. Any money gifted from your earnings (so long as it does not affect your lifestyle), or to support a dependent relative’s living costs, is also exempt.

Of course, gifting large portions of your wealth whilst you still have many years to live is not ideal for many people, especially those who wish to maintain a degree of control over their assets while they are still alive. That’s where trusts often come into play. Put simply, they provide a vehicle for reducing the value of your estate while still keeping control of your assets.

When your assets are transferred into a trust, you no longer own them but you can decide how the trust is managed, which might include ensuring your children can only access some assets when they turn a certain age, or even setting up a trust which allows you to make regular withdrawals to supplement your retirement income. Visit our article on trusts to learn more.

Long-term view

Trusts, and IHT planning in general, can be daunting and complex, so it’s wise to take advantage of bespoke, trusted advice from an independent financial adviser. A good retirement plan often combines several different strategies and mechanisms for reducing your IHT liability, ensuring as much of your wealth as possible is distributed as per your wishes. A long-term view, crafted with the help of an expert who is constantly monitoring how the changing tax landscape impacts you, will maximise the benefits of all the reliefs and exemptions available.

“It's not only about whether you can reduce your estate by giving assets away and making use of IHT exemptions but also can you cover the IHT liability?” says Philpott. “One of the big problems with estates is when someone dies, to obtain probate you have to pay the inheritance tax. The executors can't access the assets in the estate until they've got probate. It’s a real catch-22 problem a lot of the time. Life Insurance policies, which guarantee your family a payout when you die can be used to fund inheritance tax liabilities, and are definitely worth consideration.

You don't have to just go with one option, it's about looking with an expert at all the various options to find what's best for your individual situation and objectives.”

If you think your estate will be valued above your nil rate band and believe you would benefit from inheritance tax planning, book a call with an Ascot Lloyd Financial Adviser.


Our Financial Advisers are available on the phone so please contact us if you have any questions.

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