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Inheritance Tax – don’t let your heir(s) down

In my 20 years as an IFA, I’ve found there’s one subject that people really don’t like to talk or think about too much – death. More specifically, their own death.

Starting a blog with such a heavy step might feel a little uncomfortable (professional marketeers will have their heads in their hands), but before you click on that video of a dog riding a skateboard, hear me out a little longer…

Many of us delay or avoid making preparations for the time we might leave this mortal coil but from a financial planning perspective, there’s one compelling reason to give it some attention. To paraphrase Benjamin Franklin, death is the first of life’s two certainties. The second is tax. Put them together and you get Inheritance tax (IHT).

Unlike the end of the tax year (April 5th by the way) which gives us a clear deadline to take action in respect of things like ISA or pension funding, there is no deadline for IHT…not one that we can predict anyway. The lack of urgency and morbid subject matter probably explains why an astonishing 60 per cent of us don’t even have a will, let alone make IHT provisions.

Where there’s a will…

If you have an estate of any meaningful value, a will really is a must. Many assume their family or heirs will automatically inherit everything on their death regardless – this might be true to an extent but the way in which your estate is divided is far from ideal and plain impractical for most families (Google “Intestacy rules” to see how unnecessarily complicated this is).

But a will on its own doesn’t necessarily make provision for IHT itself. To see more of your money make it’s way to your beneficiaries or charitable causes close to your heart, further action is required on your part.

I respect that some of you aren’t averse to paying taxes even if it means up to a third of your money finding its way to HMRC. But for others, what’s preventing you from taking some simple steps to preserve more of what you’ve worked hard for?

In my experience, some are initially unsure about giving assets away because they don’t want to risk potentially leaving themselves short of money in the future. This needn’t be a concern – ‘Cash Flow Planning’ is a very handy tool that independent financial advisors use to help you understand exactly how much money you’ll need for the rest of your life. This gives you the confidence and perspective to then plan your IHT strategy accordingly.

Some perceive IHT planning to be too complicated, costly or too final. Of course, some administrative effort and costs can’t be escaped, but if this is what’s stopping you from exploring options with an IFA, I can assure you these are nowhere near as painful or rigid as you might believe.

What steps can you take to mitigate IHT?

There’s a lot you can do but the most basic action is to reduce the value of your estate by making lifetime gifts to your beneficiaries (“giving with a warm hand” as often described). You can hand them money or assets directly but if you’re worried about them frittering it away, then you can gift to them via some form of trust. The benefit here is that you’ve removed the money from your estate but importantly you maintain control over how it’s invested and distributed. Certain trusts will even permit you to receive an income from the trust assets, which means you’re not giving up the money completely.

Away from gifting strategies, you might consider investing in IHT-efficient investments like a portfolio of AIM shares. These typically qualify for Business Relief which means that you get an exemption from IHT provided you’ve owned the shares for at least two years (and still do so at the date of death). Note that AIM companies tend to be smaller in size so their values tend to fluctuate more than shares in companies listed on the main stock exchange. But for people with some risk appetite or as a small part of a wider investment strategy, it’s worth considering.

One very under-used solution is to effect a specific type of life insurance policy (Whole of Life). Provided you have some disposable income to maintain the policy, on death it will pay out a lump sum to cover part or all of your IHT bill. It’s very simple but very effective and also reduces the need to make large gifts out of your estate.

Start small, start early

Those I’ve seen plan best for IHT progressively employ a range of solutions over time and get started reasonably early (typically from age 60 onwards). Whichever strategies appeal to you, IHT involves the interplay of different rules which can get a bit complicated (the seven year rule and taper relief for gifts are easy to misinterpret), so be sure to consult a solicitor and an independent financial adviser, as they each have solutions that can help.

There’s currently a government consultation under way, which might lead to some changes in IHT rules, so now might be a good time to get in touch to review your position and start considering some options.

If you’re still not convinced now’s the right time to act, perhaps you might consider the eternal circle of life and how regeneration depends upon dissolution, or as Dylan Thomas put it:

‘The force that through the green fuse drives the flower

Drives my green age; that blasts the roots of trees

Is my destroyer.’

If that’s not a poem about IHT, I don’t know what is.

Simon

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Any examples within this article are personalised to the client circumstances and objectives. It is not a recommendation to purchase any particular product. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate Inheritance Tax Planning and Will Writing.