Inheritance tax - how to plan your estate and make your loved ones' lives easier
Often described as Britain's 'most hated tax', Inheritance Tax (IHT) is perceived as unfair for many reasons.
It's perhaps most memorably characterised by Labour Chancellor Roy Jenkins as “…a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue”.
But let’s start by taking a step back for a moment.
For most individuals, IHT planning will not be an end in itself, but a component part of an estate preservation exercise, and it can only really be addressed when your own needs are secured.
As such, any planning will have to take into account not only IHT mitigation but also ensure, as the primary objective, the financial wellbeing of you, your family and others you wish to benefit, together with any impact of capital gains tax (CGT) on any lifetime gifts that may be contemplated as part of the estate planning strategy.
A starting point, for all estate planning, is to ensure that you’re clear on how you want your legacy to be distributed. Once your vison is clear, everything else will fall into place.
Who does it affect?
Each year about 25,000 families, representing about 5% of all estates, have duties to pay, mostly those living in the South East and London, where rising property prices together with frozen allowances have dragged more people into HMRC's scope. These means that many people can find themselves affected by IHT - not just the rich and famous.
So what can be done?
Many people assume they can simply give their house away to a loved one or put it in a grandchild’s name, but this could prove costly when it comes to IHT.
Here are three key things to think about when planning your estate.
Spending
You can’t take it with you, so it’s important to spend and enjoy money while you still can. This is true even if you have plans to give large amounts of your wealth to children or grandchildren.
We’re not interested in dictating what you should or shouldn’t prioritise, but keeping us in the loop and giving us a general overview of your plans can make it easier for us to see the way ahead and help you make the right choices and feel confident in your decisions. It’s our role to inform and advise of any unforeseen consequences.
Some clients feel like they need permission to spend. They worry that by spending their money, they’re not going to achieve their goals. Some are terrified of running out of money in retirement. It’s our job to look at the sums and put these worries to bed.
Gifting
What you choose not to spend, you might decide to give to loved ones. It’s up to you whether you do this while you’re still alive or leave it as inheritance once you’ve passed away. There can be significant advantages to treating your loved ones while you’re still around. Not only can it have tax advantages, it can be more satisfying and emotionally rewarding to see the money put to good use.
Once you’re happy that you’re able to enjoy your wealth, by spending it or giving it away, what’s next?
Reorganising
While we recommend talking to an adviser when planning your spending and gifting, it’s especially important to seek traditional regulated advice when reorganising your finances.
This is the part where you look for tax incentivised investments and accounts that offer genuine rewards. Gone are the days of high interest bank accounts and the list of banks offering cash rewards for those who switch to them can now be counted on one hand, but it’s important to keep a portion of your estate in cash.
Many people assume that contributing to an Individual Savings Account (ISA) has inheritance tax advantages, but their relatives may be in for a rude awakening. ISAs can have tax benefits when you’re alive, but once you pass away the money saved within them becomes part of your estate and may be eligible for IHT.
With this in mind, please get in touch to find out what your options are. We’ll work out how to make the most of your money and how to reduce the amount taken by the taxman.
By working together on your estate, we can find ways for you to enjoy as much of your money as possible while you’re alive, while still protecting your loved ones when you’re not.
Make a Will
If you haven’t already made a Will, this should be your first step. You’ll need to review it regularly, particularly following any major changes in your life such as the birth of grandchildren, moving house, or the death of a family member who stood to inherit money.
Choosing an executor
As part of your Will, you’ll need to choose someone to act as an executor. They’ll manage your estate once you’ve passed away, collecting details of your assets, ensuring all taxes and debts are paid, and distributing the rest to your beneficiaries. It’s a good idea to discuss what the role will involve with your chosen executor, so they understand their responsibilities and feel capable of following your wishes. Alternatively, you can appoint a professional and they’ll be paid for their work.
Make your executor’s life easier
If you choose someone you’re close to as your executor, it’s a good idea to do everything you can to make their life as easy as possible before you pass away. It can be wise to give them a document that outlines some of the following:
Where your Will can be found
The contact details of your solicitor, accountant and financial adviser
A list of bank accounts and investment accounts
Pension details
Your funeral wishes